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3 Positives from the 3 Listed Banks’ Latest Earnings Reports

Over the last two weeks, the three major banks — DBS Group Holdings Ltd (SGX: D05), Oversea-Chinese Banking Corp. Limited (SGX: O39) and United Overseas Bank Ltd (SGX: U11) — in Singapore released their earnings update for the second quarter of 2018.

As expected, all three banks performed well over the last three-month period with year-on-year growth in net income and net profit. In particular, there are three broad trends that I believe bode well for the all three banks over the next few quarters.

Net interest margin expansion

Investors are probably aware that higher interest rates are not good for stocks and companies in general. This is because when interest rate rises, investors allocate less of their money in stocks and more to higher-yielding assets like bonds and savings. Higher interest rates also lead to higher borrowing cost for leveraged companies, affecting their profitability.

On the flip side, banks, unlike most other companies, thrive on higher interest rate environments as they charge higher interest rates on loans that they offer and increase their net interest margin, which is the difference between the cost of capital and interest rates charged by the banks.

In the April to June quarter, all three banks’ net interest margin widened as the US Federal Reserve again raised rates earlier this year. DBS, UOB and OCBC’s net interest margin widened by 11, eight and two basis points respectively. This was one of the drivers for higher interest income seen in all three banks during the reporting period.

With interest rates expected to rise, banks can widen their net interest margin further in the coming months.

Good liquidity position

Banks are required to ensure that they have sufficient capital liquidity to survive an unexpected liquidity crunch. The Capital Equity Tier 1 capital adequacy ratio (CET1 CAR) is a commonly used metric to measure the amount of available capital that the bank has at a given time frame.

Banks in Singapore need to have at least a CET1 CAR of 6.5%. The three banks are all sufficiently covered in this regard with DBS, UOB and OCBC having CET1 CARs of 13.6%, 14.5% and 13.2% respectively.

Wealth management income builds momentum

Besides interest income earned through loans, banks also earn through fees charged for services such as credit cards, wealth management and investment banking.

Wealth management is an important driver for growth for banks in Singapore as it is a low-cost, high profitability segment. It is, therefore, heartening to see that the three banks continue to grow this segment of their businesses. DBS reported a 30% increase in its wealth management business over the last six months, while UOB reported a 15% increase in net fee and commission income, driven by strong performance in loan-related, wealth management, fund management and credit card fees. OCBC’s wealth management segment rose 3% and now contributes 31% of the group’s income.

The Foolish bottom line

The three major banks in Singapore continued to deliver strong performances over the first half of 2018. In the near-term, uncertain macroeconomic conditions (trade war, property cooling measures and China deleveraging) may hinder growth. However, at the same time, all three banks maintain a strong capital position and are growing other segments of their businesses to diversify their income stream. As such, I am quite optimistic about the long-term future of the three banks in Singapore.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has a recommendation on DBS Group Holdings Ltd and United Overseas Bank Ltd. Motley Fool Singapore contributor Jeremy Chia owns shares in DBS Group Holdings Ltd.