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Adding DBS to the portfolio on optimism over improving economy

Jeffrey Tan Published on Sat, Jul 08, 2017 / 9:00 AM GMT+8

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SINGAPORE (July 8): One mistake we made with the Singapore Market Portfolio was not including a healthy exposure to the three local banks at the beginning of the year. While a surge in non-performing loans in the offshore and marine sector in 2016 triggered a selloff, shares in DBS Group Holdings, Oversea-Chinese Banking Corp and United Overseas Bank soon recovered. And, since the beginning of this year, they have led the market higher, rallying 19.3%, 18.9% and 12.3%, respectively. The Straits Times Index advanced 11.5% in the same period.

Is it too late to jump in? We would have preferred to get in at lower prices, but we think the three local banks are not too expensive even after their recent run. More importantly, we think they are likely to continue outperforming the market. Besides being natural plays on growing economic activity and trade, the three local banks have also been making strides in the wealth management sector. In particular, DBS and OCBC have been beefing up their private banking businesses through acquisitions.

We also have not yet seen the long-expected boost in net interest margins that should come with higher interest rates. DBS, OCBC and UOB have formidable pools of current account and savings account deposits that would be a cheap cost of funding if interest rates were higher. While the US Federal Reserve has been normalising its ultra-loose monetary policy, NIMs have not expanded much yet, partly because of soft demand for loans and ample liquidity in the financial system.