[SINGAPORE] It probably will not surprise anyone that DBS, OCBC and UOB ended Tuesday (May 13) significantly higher – with gains of 1.19 per cent, 0.74 per cent and 1.55 per cent, respectively – after the US and China agreed over the long weekend to temporarily slash the crippling tariffs they had slapped on each other.
The three Singapore banks operate businesses that are sensitive to the overall health of the region’s economies, and they are among the largest and most liquid counters in the local market. This made them natural outperformers versus the Straits Times Index (STI), which closed 0.13 per cent higher on Tuesday.
Negative territory
Yet, just before the US and China called the truce, all three banks were not only trailing the STI but also in negative territory on a year-to-date basis. DBS was down 0.02 per cent, OCBC had slipped 2.76 per cent, and UOB had fallen 4.13 per cent. The STI was up 2.34 per cent.
Judging from the Q1 2025 financial reports each of the banks released last week, the post-pandemic economic recovery and surge in interest rates that boosted their profitability are continuing to wane.
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In fact, it may be time for DBS, OCBC and UOB to review their dividend and capital management policies to ensure they remain appropriate for the more uncertain operating backdrop that might lie ahead.
The banks themselves seem attuned to the deteriorating outlook for their businesses. All three of them set aside pre-emptive allowances in Q1 2025. UOB also suspended its earnings guidance for the year.
Even if their asset quality holds up, however, profitability at the three banks could be adversely affected by weak loan growth as economic activity slows, and a sharper than expected contraction in net interest margins (NIMs) as interest rates fall.
This could weigh on the banks’ net interest income – which accounts for more than 60 per cent of their total income.
In Q1 2025, NIMs weakened at all three banks. OCBC was hit the hardest, with its Q1 2025 NIM coming in at 2.04 per cent, versus 2.15 per cent in Q4 2024 and 2.27 per cent in Q1 2024.
For context, NIMs at the three banks widened from between 1.45 per cent and 1.56 per cent in 2021 to between 2.09 per cent and 2.28 per cent in 2023 as interest rates soared. They have been narrowing since 2024, as interest rates stabilised and softened.
With net interest income at the three banks facing headwinds, investors have drawn optimism from the strength of their non-interest income – which encompasses everything from trading income to fees from credit cards and wealth management services.
While this broad segment of the banks’ income has been growing fast, it tends to be volatile and hard to forecast. Some of these fee-related activities could also be susceptible to competition. For instance, foreign players Barclays and Nomura were both recently reported to be expanding their presence in the local private banking space.
Despite the relatively strong growth in non-interest income, however, return on equity (ROE) at the three banks began to plateau and fall last year. For instance, DBS’ ROE flattened out at 18 per cent in 2023 and 2024, up from 15 per cent in 2022.
Similarly, OCBC reported ROE of 13.7 per cent for 2023 and 2024, up from 11.1 per cent in 2022.
UOB’s ROE rose from 11.2 per cent in 2022, to 13.4 per cent in 2023, before falling back to 13.3 per cent in 2024.
All three banks reported lower ROEs in Q1 2025 versus Q1 2024.
While the risks to profitability at DBS, OCBC and UOB are growing, the three banks have held the attention of investors by putting increasing amounts of cash in their pockets through dividends and share buybacks.
Notably, DBS said last week that it will pay an ordinary interim dividend of S$0.60 per share plus a capital return dividend of S$0.15 per share for Q1 2025.
DBS said earlier this year it would pay a capital return dividend of S$0.15 per share per quarter in 2025, and that it expects to return a similar amount of capital over the next two years. Late last year, DBS also announced a S$3 billion share buyback programme.
DBS paid a total ordinary dividend of S$2.22 per share for 2024, up from S$1.75 per share for 2023.
Dividends, share buybacks
OCBC said in February that it will return S$2.5 billion in excess capital over two years, via special dividends and share buybacks. It paid a total dividend of S$1.01 per share for 2024, comprising ordinary dividends of S$0.85 per share and a special dividend of S$0.16 per share. It paid total ordinary dividends of S$0.82 per share for 2023.
UOB said in February that it will return S$3 billion in excess capital over three years, comprising special dividends and a S$2 billion share buyback programme. The group paid total ordinary dividends of S$1.80 per share for 2024, up from S$1.70 per share for 2023. It is in the process of paying out a special dividend of S$0.50 per share, in two tranches.
While investors happily collect these dividends, they should carefully monitor the elevated levels of profitability at the three banks that are making these payouts possible. The sunny skies might not last much longer.
