Time to Invest in Singapore Banks Stocks?

We've invested in Singapore banks for almost 10 years now. These banks have been a solid part of my portfolio for a long time, producing a steady stream of ever-growing dividends.

If you're living in Singapore, you probably know these three local banks well since you use their services pretty much every day.

A lot of folks grumble about the high interest rates on loans and the tiny interest they get on their deposits.

But hey, why not look at it differently?

This could be a clue to start digging into these banks as possible investments.

Continuing To Thrive 

We've experienced several slowdowns and sell-offs over the last 10 years.

However, 2020 & 2021 were unique - we went through an unprecedented time. This time was different.

There was a period of time when it seemed we would be wearing face masks forever.

Looking back, I still marvel at how quickly vaccines were invented, and how we were able to return to normalcy.

What a time. It goes without saying that the local banks faced dire straits as commerce seemed to ground to a halt.

This was not an economic storm but a tsunami that no one had ever seen before.

I am happy to say that the three local banks were not only able to survive, but they went from strength to strength in the aftermath of the slowdown.

They benefitted immensely from state intervention - the Singapore government drew heavily on past reserves to provide economic support to both companies and employees.

This had a significant impact in protecting a vast number of citizens and businesses from the very worst of the pandemic.

As a result, we didn't see the wild swings in unemployment that countries like the United States experienced.

While some investors complained when banks capped their dividend pay-outs in 2020, this was a small price to pay to maintain financial stability.

As the saying goes - never let a good crisis go to waste. Being in a strong financial position allowed the banks to make acquisitions as other banks pulled out.

What I Think of Them Today

Rising interest rates are good for banks.

They lead to higher net-interest margins, which is a measure of profitability that we look at to assess how profitable a bank's loan book is.

Unlike the US which feature 30 year fixed rate mortgages, most housing mortgages are fixed at 2-3 years.

This allows banks to capture the benefits of higher interest rates as time goes on and loans need to be refinanced.

They are also flushed with deposits which has capped funding costs.

So why aren't valuations higher?

The answer is that loan growth has been anaemic.

There's been a noticeable slowdown in the region and the lack of loan growth has meant earning forecast have been revised down.

On this note - I am not too concerned as loan growth will inevitably pick up when the economic cycle turns.

This is a very different situation from the worries I had about their financial health in 2020 when the economy grounded to a halt.

Valuations

Banks valuations are reasonable - and probably on the cheaper side. They yield about 5%+ at current price levels which are very attractive.

One thing I like about them vs REITs that that pay-out only about 50% of their earnings.

The rest is retained to grow the business. This has led to a sustained growth in their intrinsic values over the years.

This adds up. This is why the lows they set are always higher than the last low.

The underlying value of the business continues to compound as the years roll by.

One thing I like to point out is that they are mature businesses. We aren't a fast growing economy like India or Indonesia as there is a limit to the growth rates that these banks can sustain.

That means I pay attention to valuations and only tend to invest in them when they are exceptionally cheap.

I ran a Singapore Banks Investing Course back in 2020 - and these were the prices and their target valuations at conservative valuations then when we invested heavily in them.

Slides back from 2020

Back then, valuations were close to the lows of the Great Financial Crisis of 2008.

Rising interest rates and better than expected economic conditions post COVID allowed them to hit the lower bank of their expected valuations in 2023.

However, an economic slowdown in the region has halted their rally for now. Valuations today are nowhere near as cheap - but are still reasonably undervalued in my view and offer investors a pretty attractive risk/reward.

Investors already received about 6% in dividends, and I am confident that their intrinsic values will continue to grow in the coming years.

Combined with multiple expansion, there is no reason why the three local banks cannot deliver an annualised 10% return in the coming years.