To The Moon

Both two Singapore bankshave announced their 2021 full year earnings, let’s take a look at how these they fared.

Before we examine each individual bank based on the date of their earnings calls, let’s compare their performance side by side:

DBS vs UOB: 2021 Earnings Performance

DBS’s 4Q21 Performance

The largest of the three banks, DBS reported a 37% increase in fourth-quarter net profit over the previous year, owing to continued business momentum and lower expenses. This robust performance resulted in a record net profit of $6.80 billion for the whole year of 2021, up 44% from the previous year. That was an excellent performance.

To give you some numbers, loans increased by 9%, deposits increased by 7% (more cheap money for the bank to lend out), wealth management fees increased by 19%, transaction service fees increased by 13%, investment banking fees increased by 47%, and card fees increased by 12%.

So, what about the bad news?

Net interest income dropped by 7%. In all honesty, I expected NIM for banks to grow in this quarter due to the rising interest rate environment and that they would be able to receive more interest revenue. While DBS’ net interest income increased by 2% in the fourth quarter, it was only by a small margin.

Unfortunately, the bank profitability is still being impacted by the interest rate reduction during the pandemic, with DBS NIM remaining unchanged at 1.43%. This can also be viewed as a plus too. Because NIM has yet to rebound, DBS still has room to grow its interest income in the coming quarters despite its stellar results.

Another factor to examine for investors is how much of the profit was actually generated by the business. A closer look at its financial statement reveals that the majority of the increase is due to a reduction in special provision (SP) and general provision (GP) as the portfolio quality improved following the economic recession. When the SP and GP are subtracted from the profit, DBS actually performed worse than in FY2020.

However, there is good news: this quarter’s dividend is $0.36 per share, up 9% over the prior quarter. DBS’ forward dividend yield is roughly 4% based on the current share price of $36.25 and the assumption that $0.36 would be maintained for the next four quarters. Not too shabby!

DBS capital levels remained robust, as expected. At 14.4%, the Common Equity Tier-1 (CET-1) ratio remained largely steady. Even in the worst-case scenario with its recently announced deal to acquire Citigroup’s Taiwan consumer banking business, CET-1 ratio would still be 13.3%.

DBS non-performing loans have decreased from 1.5% to 1.3%.

Apart from that, this transaction will be supported by excess capital, so if you are a shareholder, you would not be required to do anything.

UOB‘s 4Q21 Performance

Let’s move on to UOB now. A similar pattern can also be seen. The fourth quarter’s net profit was $1.02 billion, up 48% year over year. UOB’s net profit for the whole year of 2021 is up 40% to $4 billion.

The good news is that UOB’s fee income has reached a new high. Wholesale banking income increased by 8%, cross-border income increased by 10%, and wealth management and credit card activity saw a robust comeback.

UOB has yet to gain from the rising interest rate, as seen with DBS, with the net interest margin remaining unchanged. On the plus side, unlike DBS, which saw a decline in net interest revenue year over year, UOB’s net interest income increased by 6% year over year, owing to a 10% increase in its loan book.

Furthermore, the improvement in market outlook was evident, with the total allowance for the whole year falling by 58%, from $1,554 million to $657 million. This has undoubtedly inflated the group’s net profit.

If I subtract $897 million from its FY2021 net profit, I get a net profit increase of roughly 9%, which is better than DBS but no longer as impressive as the headlines.

$0.60 per share would be the final dividend. At the current price of $32.2, the annualised dividend for UOB is 3.7%. This amount is slightly less than DBS yield, but it is still rather appealing.

UOB’s CET-1 ratio remained at 13.5% in the third quarter, significantly above the regulatory limit. Aside from that, UOB’s asset quality remained strong, with the non-performing loan ratio remaining unchanged at 1.6%.

Concluding thoughts

Overall, Singapore banksperformed well in FY2021, though I believe the future will be much more unpredictable. While the two banks expect business momentum to remain strong and that the economic recovery will continue to benefit them, there is a lot of uncertainty in the short term.

On the plus side, banks may gain from the US Federal Reserve’s interest rate hikes, which would enhance their net interest revenue. Another favourable factor for bank income growth is the increased vaccination rate and the country’s willingness to live with the virus. Unfortunately, we still can’t predict certain things, such as increased geopolitical tensions, supply chain disruptions, rising energy prices, and higher wages, all of which would have a significant impact on banks.

I’m not sure how Singapore’s banks will do moving forward. Both banks are approaching all-time highs in terms of price-to-book ratio. In fact, DBS has already surpassed its 2018 high. While we can keep the stock and enjoy the dividend, I believe the risk-to-reward ratio is no longer attractive. Disclosure: I recently sold my DBS stock to pursue other opportunities.

Source: DrWealth

$UNITED OVERSEAS BANK LIMITED(U11.SI)$