To start off, I think banks are okay mid-term(3 years in mind) but in the
short term its anyone guess as 2Q is likely to be very bad.
The MAS announcement triggered a sell-off on Thursday 30
July. Personally, I think it wasn’t really needed as I believed that if banks
are to not do well, they would have cut the dividend themselves. This announcement
seems to me that they are indicating that performances are going to fall by
about 40% compared to 2019.
Personally, I am not in favour of banks (will explain the
reasons later). But if I were to pick 1 out of the 3, it would be UOB.
Reasons why I prefer UOB(SGX:U11)
1) Least Hin Leong Exposure.
-Although not mentioned from the bank
sources, according to internet articles UOB seems to have the least exposure
compared to DBS and OCBC. As such, it seems like UOB would be a better choice
here.
2) Allowance made for Loans
From the Chart, UOB made the least allowance in terms
of %. Whether this trend holds or not in Q2 remains to be seen but at least it’s
a sign that their loans seem to be more stable and is in line with what was
mentioned in Point 1.
3) Oil and Gas Order Book.
From the Table, UOB has the least amount of loans to
O&G. Which from my point of view, it’s the safest among the three.
4)
Presence of most investment properties
In terms of safety and potential value
gains, UOB stands out the most.
However, it is worth noting that UOB has the
lowest Net income margin across the 3 banks.
Why do I not favour Banks
1)
Interest Rates at an all-time low
-This implies that margins are likely to be affected. While estimates has
been made by various research house on the impact, the interest rates has been
unprecedented and hence previous predictions have likelihood of being
inaccurate. As such, it would be better to monitor the results first before rushing
to buy before Q2 results are out.
2)
The gloom of the Singapore Economy
-Without a doubt the economy is going through tougher times with increased
unemployment rates and many short-term jobs being created in an attempt to tide
workers through.
-In
such scenario, expansion is unlikely to be the name of the game for companies.
Hence this means that they are less likely to be taking a loan.
-The price and rental index of office and retail space in Central Region have decreased as well. Vacancy Rate in both spaces have also increased, reflecting a poor economic sentiment.
3) Sudden Shocks that might not be anticipated
-With Jobs Support Scheme coming to an end for some industries, we might foresee more businesses closing down as a lot of listed companies have recorded very bad results. As such, a sudden big name closing down might end up impacting banks as a frantic search for the exposure banks have to those companies begin.
-Furthermore, while some companies are cutting jobs to conserve cashflow, if the recovery does not kick in soon, closing down might have to be the only option.
Closing Words
Across the mid-term horizon, the banks are
likely to do okay. However, a lot of recovery is also based on factors that are
not estimable such as vaccine discovery and dealing with the virus in different
countries.
To add on, interest rates have to be higher for profitability to
improve as well and for that to happen, the economy has to be back on track at
least.
At any point in the economy, there would be at
least 1 sector that would be doing well but at least for now in the next 3
months, its unlikely for banks to be that sector.
