Singapore's three largest banks are hovering near unprecedented price levels, presenting dividend-focused investors with a recurring quandary: purchase shares immediately or hold out for a potential price dip?
As of the previous Friday, the share prices of DBS Group (SGX: D05) and Oversea-Chinese Banking Corporation (SGX: O39) were tantalizingly close to their historical peaks.
United Overseas Bank (SGX: U11) lags a bit further behind but still remains within a 6.2% margin of its highest-ever valuation.
When evaluated by the price-to-book (P/B) ratio, all three financial institutions are trading significantly above their long-term historical averages.
DBS currently sports a P/B ratio of approximately 2.4, starkly contrasting its long-term average of 1.45. OCBC is trading at around 1.6 compared to an average of 1.1, while UOB commands a ratio of about 1.3, which is also above its historical norm of 1.1.
Given these elevated valuations, a critical question emerges: can Singaporean banks still generate satisfactory returns for investors primarily seeking income?
The Earnings Picture is Shifting
Bank revenues are fundamentally derived from two primary streams: net interest income (NII) originating from lending activities, and non-interest income generated by services such as wealth management, card fees, and transaction processing.
The forecast for NII is growing increasingly complex and challenging.
Net interest margins are under pressure and compressing as global interest rates soften, directly resulting in lower earnings for banks on each loan they issue.
Although reduced borrowing costs are expected to eventually stimulate demand for loans, this compensatory effect is not instantaneous and materializes over time.
OCBC has provided guidance anticipating a mid-to-high single-digit percentage decline in its NII for 2025—a projection that will be confirmed upon the release of the bank's official earnings report.
Similarly, DBS anticipates a slight decrease in its NII for the year 2026.
A positive counterbalance is that non-interest income is actively helping to soften the overall impact of this decline.
Wealth management and other fee-based business segments are gaining momentum, offering crucial revenue diversification that is particularly valuable during this period of transition.
Dividends Remain Attractive
Notwithstanding concerns over high valuations, the trailing dividend yields presented by these banks are notably compelling.
Both DBS and OCBC currently offer yields hovering around 4.9%, while UOB leads the trio with a more attractive yield of 5.6%.
Investors should be aware, however, that these yield figures incorporate special dividends and capital return initiatives, which are funded from excess profits accumulated over the preceding two to three years.
As the banks navigate the ongoing shift in NII, the long-term sustainability of their dividends will critically depend on how successfully their non-interest businesses can counterbalance the headwinds facing their lending operations.
We have already witnessed UOB and OCBC slightly reducing their interim dividend payments.
DBS, in contrast, has demonstrated greater resilience to the decline in interest rates and may potentially even increase its shareholder payout.
That being said, DBS also trades at a significantly higher valuation multiple compared to its two peers.
The Waiting Game has Costs Too
For investors deliberating between an immediate purchase and a patient wait, it is essential to weigh the associated trade-offs.
Buying shares today allows you to start collecting dividends immediately, but you must accept the inherent risk of a subsequent decline in share price.
If you choose to wait, you might secure a more favorable entry point, yet the timing of such an opportunity is entirely unpredictable.
Meanwhile, by remaining on the sidelines, you forgo potential dividend income entirely.
Here is a pragmatic perspective: the decision does not have to be a binary one.
You can initiate a modest position today and subsequently add to it if and when prices experience a decline.
There is no urgent pressure to commit fully; long-term investment success is rarely determined by a single decision made on any given day.
Some investors may nostalgically look back at 2020, when DBS traded between S$18 and S$19, and label it a golden buying opportunity.
However, it is crucial to remember the profound uncertainty that characterized that period: the Monetary Authority of Singapore (MAS) had instructed banks to cut dividends by 60%, and effective vaccines were merely a distant hope.
As bestselling author Morgan Housel aptly observes: "Every past market decline looks like an opportunity. Every future decline looks like a risk."
Get Smart: Have the Right Expectations
If you are holding out for Singapore bank stocks to trade at their book value before buying, it is important to fully understand what that scenario would imply.
DBS's current net book value per share stands at S$24.28.
The last three instances when DBS traded at or near its book value occurred during severe crises: the 2008 Global Financial Crisis, the 2014 oil price collapse, and the 2020 COVID-19 pandemic.
If the current price levels instill a sense of fear, it is unlikely that you would possess the courage to invest during a genuine market crash when prices are plummeting.
The fundamental key is to enter the market with realistic and appropriate expectations.
Focus your energy on factors within your control: your investment allocation strategy, your personal investment time horizon, and your commitment to holding high-quality businesses for the long term.
