Category Archives: DBS

If this stock market turmoil ends up in a liquidity crunch, do you know what the banks will do?

During the times when there is liquidity crunch, such as now when there is an impending interest rate hike in US or when there is a  stock market rout in the region, what is the most important thing for the banks? Yes, CASH at hand! When there is an extreme liquidity crunch, the banks will tend to play it safe. Whether or not they are going to use it, raising cash is the most important thing to do during such times.

Historically, there were many precedences. During 1998, when there was the Asian Financial Crisis, DBS bought POSB. It was the people’s bank with a huge amount of deposits. The main lending activities of POSB at that time was mainly in secured lending such as housing loans and the deposits at that time was huge.

In the recent global financial crisis in 2008, DBS raised S$4.2 billion through rights issue. Seven hundred and sixty (760) million rights were offered at $5.42c, a hefty discount of 45% from the last day trading price of $9.85. Each right was offered at 1:2 basis, meaning 1 right for every 2 shares owned.

In parallel OCBC went into offering preference shares at $100 per share in August 2008. To sweeten the deal, the dividend was offered at 5.1%, a rate way above bank’s interest rate even until today. OCBC raised $1 billion from that exercise. Following that move, UOB also followed suit with the same offering but at a slightly lower rate of 5.05%. UOB also raised about $1billion from the exercise.

In such times, when people are fearful and cashing out of the stock market, this appeared to be the best time for the banks to raise cash. After all, with bank interest rate at historical low couple with the stock market turmoil, many investors are looking to park their encashed money in safe instruments that offer sufficiently good returns. With the bank’s brand name and offering good dividend payout, it is possible for the banks to raise funds with relative ease.

What do the banks do with those money? Well, during market turmoils is one of the best opportunities for the banks. It is a question of survival of the fittest. Many so-called ‘fantastic companies’ will not be trading at historically fire-sale prices unless during such times. Remember that Astra, was one of the crown-jewel of the Indonesia companies before the 1998 Asian Financial Crisis. It was forced to sell its shares to Cycle and Carriage (C&C) before C&C was taken over by the Jardine group. If the shares of Astra had not been sold to C&C, Astra would not have been in existence or could have been disintegrated into smaller companies. Who knows Danamon Bank in Indonesia may be up for sale once again with better selling conditions. The last time, when the deal fell through was in 2013, when the Indonesian regulators allowed only to a maximum cap of 40%. DBS, on the other hand, was looking into acquiring 67.37% (for a price tag of $542.4m) which will ultimately trigger it to make a take-over offer of the bank.

Shareholders, in particular those who hold blue-chips, should maintain your liquidity now. You may be put in a situation to acquire rights or preference shares at a steep discount. Perhaps if you look at it in a long-term basis, it may not a bad deal. When the good times come back again, maybe you are rewarded with 500 DBS shares or 1000 OCBC shares as dividend in its yearly dividend distribution exercise.

(Brennen Pak has been a stock investor for more than 26 years. He is the Principal Trainer of BP Wealth Learning Centre LLP. He is the author of the book “Building Wealth Together Through Stocks.”) – The ebook version may be purchased via www.investingnote.com.

Market psychology – Are we at the market bottom?

Many people seemed to believe that the market is low now because we tend to anchor the stock price at where the stock price is at its maximum. Just a few months ago, it was 3500 on the STI and now we are at 3050. DBS, a good proxy for the local economy, was recently at its high around $21.50 a few months ago. Right now, it is trading at $18.70 and it appears sufficiently low  to buy. After all, the difference is a whopping $2.80 per share. But things have changed. The economic fallout in China and the falling currencies in ASEAN countries will shift the fundamentals leading to the steep fall the share price. Brace tight! The market has not bottom out yet. It should undershoot(1).

(1) See investing psychology on Building Wealth Together Through Stocks.

(Brennen Pak has been a stock investor for more than 26 years. He is the Principal Trainer of BP Wealth Learning Centre LLP. He is the author of the book “Building Wealth Together Through Stocks.”) – The ebook version may be purchased via www.investingnote.com.

 

 

DBS- script dividend is out of money

DBS announced the script dividend of $0.60 per share at a conversion of $20.99 per share. This was established during the book clourse around the end April 2015. In the month of May 2015, the share price had been higher than $21 per share for the first half of May 2015, but of late if has slide below $21.00. With the script dividend conversion rate of $20.99, it should be out of money if the shareholders chose to take script dividend and held till today. Given that DBS does not give discount to entice shareholders to take script dividend, I still prefer to take cash, and when the opportunity is right, to use the cash dividend to buy shares from open market at a much lower price. In this way, I would not have odd lots of shares and at the same time enjoys an opportunity to buy DBS shares at a lower price.

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Perhaps, it’s high time that DBS should consider a discount when distributing script dividend and, more importantly, to increase its dividend payout given that dividend has been flattish for a long, long time. With the increasing share price, the dividend yield is dwindling fast. The dividend of $0.60 over a share price of about $21 per share puts the dividend yield below 3%.

(Brennen Pak has been a stock investor for more than 25 years. He is the Principal Trainer of BP Wealth Learning Centre LLP. He is the author of the book “Building Wealth Together Through Stocks.”) – The ebook version may be purchased via www.investingnote.com.

Singapore banks – Net interest margins (NIM)

Much fanfare has been thrown on banks’ net interest margin (NIM) as the impending interest rates hike seemed to gain traction. As it is, our interest rate lags behind the US interest rates, and it is only a matter of time that our interest rates go upwards as well. As banks are in the business of lending, it is natural that the banks are the likely beneficiaries of interest rate hikes. This leads to an active interest in the bank shares in Q4 2014. The share price of the local bank, namely, DBS, OCBC and UOB were up between 7.4% and 11.8%.

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Predictably, in the months that followed, the 3-month SIBOR were increasing. In March 2015, the 3-month SIBOR hit 0.9% and then 1.02% in April 2015. However, as of 29 May 2015, the last trading day of May 2015, the 3-month SIBOR was only at 0.83%. Even though the quarterly financial results of our banks showed significant increase both on y-o-y and q-o-q bases, the NIM were actually quite disappointing for DBS and OCBC. OCBC’s NIM reduced by 5bp on q-o-q and 8bp on y-o-y. DBS’s NIM increased by 3bp y-o-y, but dropped by 2bp q-o-q. This bagged a question whether the interest rate hike is really gaining traction, or it is too early to tell.

Here are the possible outcomes with the interest rate hikes:

a.   The existing borrowers of bank loans such as the business and individual borrowers are subject to higher loan rates, which effectively benefit the banks. It is possible that these borrowers look for alternative sources of funds, but sources are limited as general interest rate environment increases.

b.   New borrowers have less propensity to borrow, as the interest payments become more costly. There may also be some pockets of borrowers who decide cash out their assets or to sell out other assets to pay off their loans, thus causing a net decrease in borrowing. There may even be possible that some cash-rich borrowers decide to reduce their cash holdings to redeem their loans.

c.   The impending interest rate hike may put off borrowings of some ‘marginal borowers’, thus causing the banks’s net borrowing to decrease. This may have resulted in the decrease in the 3-month SIBOR. However, it may be too early to tell at this moment.

d.   The interest hike may result in more non-performance loans (NPL) which negate the benefits of the interest rate hike for the banks.

The valuation of DBS is included in the latest book – “Building Wealth Together Through Stocks”. The methodology can be read across to other banks. 

(Brennen Pak has been a stock investor for more than 25 years. He is the Principal Trainer of BP Wealth Learning Centre LLP. He is the author of the book “Building Wealth Together Through Stocks.”) – The ebook version may be purchased via www.investingnote.com.

DBS – the XD price drop suggests potential upside

DBS stock went XD on Monday, 27 April 2015. The stock price fell 20c when it went XD. It enjoyed 4 successful days of rises before 27 April 2015. The dividend distribution was 30c, whilst the dop was 20c. This indicates that more people are unwilling let go of DBS shares even after receiving the final dividned of 30c per share.

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In fact, as seen from the prices rise yesterday to $20.99 and today to $21.05, it shows that investors believe there is upside potential.

 

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(Brennen Pak has been a stock investor for more than 25 years. He is the Principal Trainer of BP Wealth Learning Centre LLP. He is the author of the book “Building Wealth Together Through Stocks.”)