Tag Archives: Banks

DBS – shocks and stress in holding stocks

Today marks the 10th anniversary when Lehman Brothers fell into bankruptcy on 15 September 2008. Despite the on-going tariff war between the US and China, there is a general sea of calmness in the major stock exchanges all over the world.  Back then, scene was very different. For several weeks before 15 September and several months after that, the front few pages of our daily newspapers were full of bad news.

Lehman Brother’s downfall also pulled along with it several big banks and financial institutions. AIG, Citigroup, JPMorgan Chase, Bank of America, Fannie Mae & Freddie Mac were all at risks, and were awaiting government bailout. With the crisis hitting the big financial institutions in the world’s largest economy at that time, it is almost certain that small and open economies, like Singapore, was going to feel the onslaught as well. The STI fell from the high at close of 3,875.77 made on 11 October 2007 to 2,486.55 on 15 September 2008, retreating 35.8%. It did not stop there. As bad news, continued to flush all over the news media, the STI fell further. DBS, a good proxy of the Singapore economy, and a heavy weight on the STI certainly cannot escape from this avalanche. Its share price fell from more than $20 to less than $10 by the end December 2008, retreating more than 50%. Everywhere is fear, and we did not know which blue-chip stock, in particular which financial stock, was going to go under. Fund managers were all selling as redemptions picked up speed.

Perhaps, the stubborn side of me helped. I decided to swim against this tide, buy a few shares, close my eyes, close my ears, go for a long haul, do not sell irrespective of whatever happened, and see how it would turn out after 10 years. In the worst-case situation, I would lose some savings. If I have been wanting to own DBS, this would have been a good opportunity. In a financial crisis of such a scale, huge wealth is transferred one person’s pocket to another’s pocket. Debtors will be punished, creditors will be rewarded. Spenders will become poor, and savers will feel rich. Cash is king. However, cash is still only cash if it remains in the bank. So, this should be the time to put our cash into good use. Splurge and buy up assets that had never been put on such discounts, was the key.

A few weeks after purchasing the stock, came the next bombshell. DBS decided to raise rights, 1 for 2 shares, with a whopping 45% discount at $5.42 based on the last day trading price at $9.85. It literally forced existing shareholders to take up the rights. So, no choice, I dipped further into my pocket to pick up the rights. (I remember, I tried to buy extra rights, but I believe I only managed to get a few shares to round off the lots due to over subscription of the rights.)

In the midst of such a crisis and with a much bigger market float after the rights issue, the share price continued to fall. In fact, the share price went even below $7. It certainly, took some grits and guts to continue to hold the shares. Even at $7, it was still a long way to fall if it was really going to be very bad. My intuition impressed upon me that if DBS were to fail at that time, we would all be in real serious trouble. Our property price would plunge, our car value would be decimated and our Singapore dollars would be very unstable in the forex market. So, whether we are on shares, on property or on cash, it was not going to matter. And, with the US dollars also plunging at that time, the only shelter is probably gold. After all, it was only 10 years ago then that DBS gobbled up POSB. In the minds of those people on the street, POSB was still the people’s bank. It is unlikely that it would be allowed to fail. The epicenter of this financial crisis was in the US. We are only feeling the effects of this financial tsunami. The question was how low could DBS touch, and not whether it would fail. It turned up well, and the fear was quite short-lived. The stock came up back again after March 2009, when STI temporarily went below 1,500.

Was it plain sailing after that? Not quite. I should ask, were there anything along the way to de-rail holding the stock? Certainly yes. When I purchased the stocks, my objective was to go long, and very long and to disregard the share price. So, the only ‘financial benefit’ was the dividend from the stock. At that time, this ‘giam-siap’ (stingy) bank, gave only $0.60 per share as dividend.  When a reliable source, told me that the bond coupon rate of Swiber was at 7%, I felt stupid again. If we invest in the bond at the cost of $250k, the yearly coupon would have been $17,500. A back-of-envelope calculations of the equivalent amount, would have been about 15,000 DBS shares at the prevailing price of between $16.50 and $17.00.  For 15,000 DBS shares, the dividend would only be $9,000. And this stark difference would carry on yearly, for probably 4-5 years, until the bond matured. If one were to chase for the last dollar, it would make sense to sell DBS shares and buy Swiber. So, would it make sense to sell off the shares and buy bond instead? Nobody knows what was going to happen. But, I do believe when the bond yields were high at that time, many people actually switched out of equities and buy bonds as well as other high yield instruments. It was lucky. I chose to remain in equities. The reason was that there was literally no secondary market. If we really wanted to sell, nobody was going to buy from our hands, unless we depress our price significantly. Precisely, at that time, due to liquidity, the corporate bond of Genting was trading at a discount, while the perpetual bonds were trading at a premium. So, if we want to get into it, the only choice was to hold corporate bonds to maturity. It turned out that the decision was right. Swiber defaulted and remain suspended today.  And, DBS was no longer a ‘giap-siap’ bank as it used to be. It doubled its dividend.  And, right now the yield based on the average purchased price would have enjoyed an even higher yield compared to Swiber or the any REITs. In fact, this stock would have become an equity-bond situation mentioned in the book “Warren Buffet and the Interpretation of Financial Statements”, by Mary Buffet and David Clark, 2008. It left me scratching my head what was the term ‘equity-bond’ really mean at that time when I was reading that book. Now, I understand. In a few words, it means to buy an equity, let the share price move up to its intrinsic value. As the dividend starts to move up back-on-the-heels of the equity price, we would have, in effect, enjoyed the yields of bonds.

Then again, were there any more scares along the way? Certainly yes. When China suddenly devalued the RMB in 2016, it was envisaged that China was not doing well on the economic front. That again pushed down the STI. In particular, the bank stocks were hit. All the three banks stocks were trading about 10% below book value. DBS, once again, fell below $14 for the first time in the few years. It had been languishing around $16-$17 per share almost throughout the year 2016. Only in 2017 did DBS share price climb up slowly and steadily, following of several quarters of good financial results. With the announcement of its new dividend benchmark, it has arbitrarily created a floor for the share price. If the bank continues maintain its dividend payout of $1.20 per share, it should help maintain the share price north of $24 per share, giving a yield of about close to 5% per share.

It has come a long way, and will there be more volatility going forward. Certainly yes, the tariff issues between the US and China is still yet to be resolved. Also, for so many years, the interest rates all over the world have been held extremely low. Debts were now at their historical highs once again. If FED were to increase interest rates aggressively, I would not be surprise that another crisis could erupt, maybe, this time, the epicenter is nearer to us. Then again, DBS share price can get hit again.

Disclaimer – The above arguments are the personal opinions of the writer. They do not serve as recommendations to buy or sell the mentioned securities or the indices or ETFs or unit trusts related to it.

Join us in the facebook – BP Wealth Learning Centre LLP.

Brennen has been investing in the stock market for 28 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is the instructor for two online courses on InvestingNote – Value Investing: The Essential Guide and Value Investing: The Ultimate Guide. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

DBS – The pleasant surprise

Abstract – Two years ago, the sudden devaluation of the Chinese yuan RMB caused DBS share price to fall below its book value. Since then, DBS Holdings share price has been on the rise. In a similar fashion, the share price of OCBC and UOB also fell to below their respective book value. For the past two years, the share prices of all the three banks were rising at unprecedented pace. As of 23 Feb 2018, the share prices of DBS, OCBC and UOB were respectively at $29.59, $13.37 and $28.05 respectively.

It came as a big surprise to many that DBS announced a very generous dividend distribution policy following their internal assessment that they have been more than fulfilled the Basel reform requirements. Historically DBS has never been this generous and their dividend distribution to share price ratio has almost always been lagging behind OCBC. Even during times when they offer scrip dividends, their discount has always been lower than that of OCBC. As their share price advanced, the number of scrip dividends that can be converted from the dividends gets smaller, and it became extremely daunting for people who has been targeting to get, for instance, 500 shares for every year of dividend declared. In simple arithmetic, by the time the share price hit about $20, we need to have at least 15,152 DBS shares before one can get 500 shares of scrip dividends assuming that no discount was given for taking scrip dividends. As the share price goes upwards, it is almost an impossible task as the horses are running well ahead of the chariot.

But that all changed overnight as DBS suddenly moved up the dividend generously from the expected final dividend of 33 cents for FY 2017 dividend to 60 cents and topped it up with a special dividend of 50 cents. In addition, it further announced that the dividend going forward to be marked up to $1.20. This means that we should generally expect the dividend pay out to be $1.20 per share for 2018 and, perhaps, even for the next few years. The whole dividend equation changed overnight. What that has been a more and more distant dream of getting 500 shares for each yearly dividend distribution became an instant possibility overnight. For example, in the above case, we do not need 15152 shares for have 500 shares of declared dividend. Instead, we need to have only 8333 DBS shares to get an equivalent of 500 DBS shares in declared dividend. Fortunately, or perhaps unfortunately, depending on whether one owns the shares or still wanting to buy the shares, the share price never look back. It has been gradually rising two weeks ago from $25.36 on 7 February, the closing price on the day before the results announcement, to $29.59 as of yesterday. This represents a rise of more than $4 or about 16.7% rise within a matter of two weeks, literally unperturbed by the Chinese new year holidays in between. With the newly declared dividend for at least in the near future, it actually helps provide a ‘floor’ share price for the stock.  (For those who wish to have a better idea of the valuation may wish to refer to my on-line course on the investingnote.com platform – Value Investing – The Essential Guide) For example, the share price of $24 would now have been considered a steal when it was said to be ‘extremely expensive’ even at $20/- just twelve months ago.

Apart from the positive effect on its share price, the newly declared dividend distribution by DBS has other pulling effects too. It turned on the pressure for the other two banks to up their dividends going forward as well. In fact, in the latest results announcement for FY2017, both OCBC and UOB have already declared a higher dividend whether in the form of the final or special dividends. As we all know, bank performances tend to move in tandem with each other. So, with the more generous declaration for DBS, it is also likely that the heat for OCBC and UOB be turned on to bring up their dividends as well. Even if that do not happen in the near future, the current perception of a higher dividend declaration would help push up their share prices. Adding to this tail-wind is the expectation of higher net interest margin in the coming months. That means the shareholders of the all the banks would ‘huat’ (prosperous) in the light of this pleasant announcement.

Disclaimer – The above arguments are the personal opinion of the writer. It is not a recommendation to buy or sell the mentioned securities.  

Brennen has been investing in the stock market for 28 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is the instructor for two online courses on InvestingNote – Value Investing: The Essential Guide and Value Investing: The Ultimate Guide. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

The local banks – DBS, OCBC and UOB

The local banks have just released their financial results for the financial year 2016. All the three banks suffered a decrease in profit for FY 2016 compare with FY 2015. OCBC seemed to have it worst, while UOB did comparatively well. Before the results were released, it was widely expected that the banks would suffer a decrease in profit in view of the flagging economy, and most importantly their exposure to the offshore and marine industries that had turned sharply for the worst following the sharp decline in the crude oil price last year. For almost whole of last year 2016, we have seen several major defaults and major loan re-structuring exercises in this sector. Surely, in such a scenario, it would be a miracle if the banks can go through the year unscathed.

One interesting thing to note, however, is the impairment charges that the banks set aside in FY 2016. OCBC and DBS increased the impairment charges by 48.8% and 93.0% respectively, while UOB decreased it by 11.6%. One deduction, I can make is that UOB felt that it had already accounted for all the problem loans, and there was no longer a need to make further provisions. Meanwhile, OCBC and DBS were still making provisions for loans that might deteriorate in time to come. One possibility is that they are pre-empting the possibility of Ezra that can go in the path of Swiber or Swissco. Due to this significant impairment charge, the EPS of OCBC and DBS were marked down by 13.7% and 3.0%. The drop in the EPS of UOB is mainly due to the higher operating costs for the year, and is a different nature from the other two.

For the net interest margin (NIM), the fate is entirely different for all the three banks. OCBC’s NIM remains unchanged at 1.67%, UOB decreased from 1.77% to 1.71%, while DBS increased from 1.77% to an uninspiring 1.80%.

On the whole, the business risk for the banking sector has increased. Asset qualities were decreasing, and decreasing at a very fast rate. In the meantime, the share price for the banks has been on the uptrend for several months. All this translate to the fact that the ‘margin of safety’ continues to get thinner as the days passed.          

 To know more, register at on bpwlc.usefedora.com. Registration is free. Paid students who are attending the stocks review master program on 11th March 2017 are entitled free access for the online courses.  Passwords will be sent to your emails to enable your access to the modules.  Courses are other sectors are also available.      

 Brennen has been investing in the stock market for 27 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

If we missed the best stock upsides

Today marks a little more than one month after Donald Trump won the US election. When he first won the election, the market at first reacted negatively, followed by a strong rally and then tapered off in the last two days. The banking stocks, in particular, were the biggest beneficiaries of this rally. DBS has advanced from about $15.20 to a high of $18.32 and then settled at $17.83, an increase of $2.63 or about 17.3%. Similarly Overseas Chinese Banking Corporation (OCBC) had also advanced $0.73 or 8.6% from $8.53 to $9.26. United Overseas Bank (UOB) also showed a significant increase of $2.31 or about 12.4% from $18.59 to $20.90. Of course, if one holds the bank stocks, the return for this month alone is extremely significant.

Despite the rally, many people still asked the same question just a few days ago– DBS bank, can still buy now? Does it mean that these people missed boarding a stationary wagon and is now chasing a moving one? Actually, if we look at the bank stocks, in particular DBS, it has been parking below $16 for many months, right from the beginning of the year or even before. Why do we need to wait for it to move up to chase it? Why can’t we buy it at our own pace and wait for the rising tide to raise our boat?  It appeared logical right now in hindsight, but seemed to be an irrational decision when the share price was oscillating between $15 and $16 per share for a long time. Very often, when a stock or the market rallies, the onset is often the sharpest and this is when the smaller players start to take note. By the time when one start to confirm, double confirm, triple confirm, a significant part of the upside has already been priced in the stock. So by the time retail investors start to buy into the market, perhaps there is only the last 20-30% upside. We always come across a statement to the effect that if we missed the best 10 trading days, our stock performance would just appear ordinary. Worse still, it could even be negative performance despite that the STI moved up significantly. To me, stock market has a place for both big and small players. Big players cannot play like a small player and a small player cannot afford to play like a big player. Big players buy into the market to cause the market rally, but the advantage of small players is to be able to buy into stocks without causing big ripples in the stock market. That’s where we should play to our advantage. Remember that our wealth is not just measured by the amount of money we have in the bank. Our wealth is measure by the sum of our cash, stocks, properties and whatever assets that we possess.  So, there is no need to be in cash all the time. It is important to engage the stock market all the time than to wake up only when the rally has already been well underway.

Happy investing!

For more, join me at investing note by clicking here!     

Brennen has been investing in the stock market for 26 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

What can we expect from the American election?

Now that the American election is over, and Donald Trump has been announced to be the president-elect. The inauguration is scheduled to be on 20 January 2017. As a biggest economy in the world, we can expect big event changes to have a bearing on the many smaller economies. Certainly, the promises made by Donald Trump during his campaigns would be closely followed, as they may become the new government policies during the term of the new president. Of course, one may argue that these may be promises, and they may not be fulfilled or at most partially fulfilled after looking at the cost-benefits of all these promises. After all, until the fate was sealed on last Thursday, Donald Trump had been an underdog in this neck-to-neck race with Hillary Clinton. To change the odds of winning this election, he might have to resort to populist promises to win votes.

 

However, as investors, we tend to make anticipations of the future to guide us in our buy or sell decisions. So the closest or best clues would be to go along the lines of his background as well as to rely on his promises during the campaigns. As it is, he has been a real estate magnate businessman with zero political back-ground, many would have expected that he would be especially focused on infrastructure developments. These constructions would likely to bring about inflation resulting in FED hiking up interest rates more aggressively. So in all likelihood, our bank interest rates would also perk up in time to come. As it is in the last few days, the local bank stocks such as DBS, OCBC and UOB were holding up relatively well while many local stocks were on a down-trend. In particular, DBS advanced $1.20 or about 8% in the last two days on Thursday and Friday. Conversely, the interest rates sensitive stocks such as bonds, REITs, property counters as well as many debt-laden companies were hit quite badly. Many emerging market currencies are also affected as funds are expected to repatriate back to US in search of higher interest rates. Thus many Asian currencies have also been on the downward trend. In fact, companies, especially the debt-laden ones that borrowed or purchased goods in US dollar are likely to be hardest hit. Consequently, many Indonesian company stock prices fell very hard. They purchased goods in US dollars and sold locally in rupiahs. Stocks like Jardine C&C, which held 50% of Astra shares, had already retreated about 10%. This situation is likely to continue as long as the spectre of interest rate hikes remains in the mind of investors.

 

The other significant factor mentioned in his presidential campaign was pro-American, pro-white policies that point toward protectionism. This means that many economies depending on US for trade will be also affected. These countries include Indonesia, China, Taiwan, Malaysia, South Korea, Philippines, Vietnam and even Singapore. Furthermore, with their respective currencies retreating against the US dollars, it is likely to make things very expensive for these countries. Certainly the respective stock markets are not going to be spared as well. The fear factor should likely continue to weigh on the Asian stock markets in the short term.

 

While the situation looks grim, it is only based on anticipation. The reality may not turn out to be this way after more detailed review of those promises. It could even be that the President may decide to soften his stance on free trades after his inauguration.

 

So, end of the day, it is still important to continue to stick to our long term-plan in building our stock portfolio. The fear factor may even present interesting opportunities for us to buy stocks that are beyond our reach during euphoria.      

Good luck!

Brennen has been investing in the stock market for 26 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

Banks may be cheap now, but…

Cash is king. Yes, during financial turmoil like this when stock markets all over the world are sinking, having cash is the key. According to The Straits Times on 20 January 2016, just last year alone, about US$735 billion left emerging market. China accounted for $676 billion which formed the bulk of the outflow. Similarly, the fund inflow last year was about US$231 billion against US$1.2 billion per year from 2010 to 2014.

On the corporate front, banks are natural victims during times of liquidity crunch too. Most bank share prices have sunk more than 30% from their recent high when the ST index hit 3500. Right now, banks are trading near or below their book value (BV). Exactly, five months ago, I had written in my blog that there was always a possibility that banks might start to raise funds through rights issue if the turmoil persists. So far, none of the banks have raised alarm, but still it is possible if banks deem it fit to do so. After all, there were past precedence of fund raising activities during financial crises. For example, DBS raised S$4.2b in end 2008 through 1-2 rights issue. Similarly, OCBC and UOB raised $1 billion each through preference shares issue. In a similar way, during Asian financial crisis in 1998, DBS acquired the POSB. Looking ahead, it is still a possibility especially during such times when other banks or companies may fall into bad times. Such huge fund raising activities can come in handy for future acquisitions.

Brennen has been investing in the stock market for 26 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

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.

Slide33

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.

OCBC – script dividend in the money

Recently, OCBC announced the distribution of scrip dividend in lieu of cash dividend. Its dividend was $0.18 per share and the bank had established a conversion rate of $9.50 per share, a discount to on-going share price. Given the discount to the prevailing share price, the scrip dividend has been ‘in-the-money’. Those shareholders who opted for script dividend would have gained much more than the original dividend if he had held the stocks till today.  With the current share price of about $10.36, the share holders would have gained $0.86 per share for the dividend that they held in scripts. In fact, script dividend can be a powerful compounding tool if the share price increase gradually over the years.

Slide32

 (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%.

 Slide35

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.

 Slide24

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.

 

coverblue (2)

(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.”)