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 took a look at the bank’s earnings per share growth and how it corresponds to its dividend increases, and in my the second article I looked at the size of banks’ loan books and their loan-to-deposit ratios.
In my final article here, I’ll be focusing on the banks’ net interest margins (NIMs) and its non-performing loan (NPL) ratios.
DBS, OCBC, and UOB all make the majority of their income from lending money. This comes in two parts – firstly, the size of the loan book (which I analysed in Part 2) that has seen a clear uptrend over the past few years and the secondly, the net interest margin.
The NIM figure tells investors how much money the bank makes per S$1 it lends out. For example, an NIM of 1.85% means that for every S$100 lent out the banks make S$1.85 in income.
|Net interest margin (%) (2015)||Net interest margin (%) (2018)||Non-performing loan rate (%) (2015)||Non-performing loan rate (%) (2018)|
Table tabulated by the author
*Special dividends have been excluded
Net interest margin
Looking at the table above it quickly becomes clear that all three banks have enjoyed NIM increases over the past three years. This is good news for investors as banks have been benefitting from both the increase in the loan book size as well as the NIM. Effectively, it’s double the joy for shareholders because if either factor increases it results in an increase in net interest income (NII) for the banks.
However, will NIM continue to increase? With the recent cut in the Fed Funds rate and increased talk about a recession, banks might be facing a period of slowing or decreasing NIMs. As such, it becomes even more crucial that during such periods, the banks grow its loan book in a prudent manner to avoid losses for defaults.
Non-performing loan ratio
The second metric gives us a quick look at how prudent the banks have been in dishing out their loans. The non-performing loan ratio is an indication of the loans which have been given out by the bank but where the borrowers are unable to pay the loans back.
Keeping this in mind, it should be clear that the lower the rate the better. For the table above, both DBS and OCBC have seen an increase in their NPL ratios over the past three years. This might mean they are being less prudent with how they are lending out their money. As for UOB, the bank has kept its rate steady, meaning it is giving out loans in a similar manner as before.
From the three articles on the sustainability of bank dividends, it becomes clear that the banks have a sustainable payout ratio, a growing loan book, and prudent loan/deposit ratios, and an increase in NIMs. However, NIMs could come under pressure while for two out the three banks there have been higher NPL ratios.
All in all, though, it seems like the big three Singapore banks have the capability of sustaining their higher dividend yield in the near future which should give investors a measure of confidence.
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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.