Over the last two to three years, the Singapore-listed trio of banks – DBS Group Holdings Ltd (SGX: D05), Oversea-Chinese Banking Corp. Limited (SGX: O39) and United Overseas Bank Ltd (SGX: U11) – have all increased their dividends at an astonishing rate with yields currently between 4.2-4.9%.
As a rather conservative investor and one who likes to see my income grow at a steady and stable pace, I have been asking myself if the bank’s dividends are sustainable. In my first article, I wrote on their net profits, earnings per share growth and payout ratios and how these impact their ability to pay out dividends.
In this article, I will be focusing on the growth of the banks’ loan books and loan-to-deposit ratios.
DBS, OCBC and UOB all make the majority of their income from lending money. This is not surprising as that’s the main business of banks. However, in the process of lending money, the banks take on the risk of the borrower defaulting on the loans. This means the banks need to responsibly manage their risk.
There are two sides to the story:
- The more the bank lends, the more it will make in revenue from interest and thus in income. This refers to the bank’s loan book size.
- The more the bank lends, the higher the possibility the bank might lose money due to default. This risk can be controlled by managing the amount of money lent out in respect to its deposit levels – giving rise to the loan-to-deposit ratio.
|Loan Book (S$ millions) (2015)||Loan Book (S$ millions) (2018)||Loan/Deposit Ratio (2015)||Loan/Deposit Ratio (2018)|
Table tabulated by the author
*Special dividends have been excluded
The table above gives a quick look at how the banks have been faring on these two metrics. All three banks have seen their loan books increase over the past three years. This is not surprising as individuals are continuously depositing money with the banks every month as they get their salaries or make money through other means.
However, the more important metric to look at is the loan/deposit ratio. On this front, for DBS Bank the ratio has decreased over time and this is a positive trait as it shows that the bank is not taking on unnecessary risk to increase its earnings.
The same cannot be said for OCBC, which has seen its ratio increase by close to 2%. This means that OCBC is taking slightly greater risk when comparing the two time periods. Lastly, UOB saw a slight decrease in its ratio which bodes well for its risk profile.
Following up on the previous article, the banks are not taking unduly high risks to boost their incomes and thus their dividends. This should give confidence to investors that the dividends paid out by Singapore’s banks should be rather safe for now.
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Motley Fool writer Esjay contributed to this article. Esjay owns shares in DBS Group Holdings, Oversea-Chinese Banking Corp. Limited and United Overseas Bank Ltd.
The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool has recommended shares of DBS Group Holdings, Oversea-Chinese Banking Corp. Limited and United Overseas Bank Ltd. Motley Fool Singapore contributor Tim Phillips owns shares in DBS Group Holdings.