However, they could reduce their WACC by borrowing amid the likely interest rate cuts. This would bring their WACC in line with the average of other big local banks, potentially boosting shareholder returns, Kwok says. The potential for refinancing has resurfaced, with existing capital bonds such as additional tier AT1 and tier 2 (T2) capital nearing their call dates. As of Sept 9, OCBC has $1 billion in T2 and DBS has $1.7 billion of AT1s that are callable in 2025.
Although Singapore banks are capital-rich, they may capitalise on strong investor demand for yield to “optimise their costly capital structures” through subordinated debt offerings given the likely interest rate cuts, says Bloomberg Intelligence analyst Rena Kwok. Equity is viewed as the most expensive capital, followed by hybrids such as additional tier 1 (AT1) securities, bonds, and covered bonds.
Out of the three Singapore banks, DBS Group Holdings, Oversea-Chinese Banking Corporation (OCBC) and United Overseas Bank (SGX:U11
) (UOB), DBS and OCBC have higher weighted average cost of capital (WACCs) with at least $4 billion in excess common equity tier 1 (CET-1) capital, higher than their target operating range of 12.5% to 14%. According to Bloomberg, WACC for DBS and OCBC were 7.9% and 8.7% respectively as of 2QFY2024, exceeding their local bank peers’ last five-year average of 7.7%.
