Asia Tea Time - #84 ☕

Singapore’s Big Three Banks Fuel Market Rally – Plus, How to Stay Savvy with Their Products

Author

Tim Phillips
December 08, 2024 • Estimated Reading Time: 6 minutes

This week I talk the Straits Times Index approaching an all-time high and why we should be paying attention to the details when we are being sold products by banks. 

Macro in Asia

Singapore’s banks drive Straits Times Index towards new all-time high

Earlier this week, Singapore’s Straits Times Index approached its all-time record high that it reached in 2007. 

The current rally is being driven by Singapore’s bank stocks, which have been posting record profits amid higher interest rates.

Why it’s happening

  • The Straits Times Index is the go-to index for stock investors in the local Singapore market and is made up of 30 of the largest Singapore stocks by market cap. 

  • Given the Singapore stock market’s relatively small size, Singapore’s banks have an outsized influence on it – the three big banks (DBS, UOB, and OCBC) together make up over 50% of the index. 

  • The banks have been on a roll, posting some sick profit numbers in 2024 as interest rates remain elevated. That has seen the Straits Times Index rise around 18% so far in 2024, making it the best-performing stock market in Southeast Asia.

Why it matters

  • Nearly everyone in Singapore who owns local stocks most likely owns one of the Singapore banks. In other words, they’re kinda a big deal. 

  • Even though the US Federal Reserve (Fed) has been cutting interest rates, Singapore banks have managed to find other ways to make that cheddar besides the typical “net interest income”.

  • Anyone invested in the Straits Times Index (via an ETF, for example) is effectively invested massively into the big banks so where they head over the next 12 months or so will impact everybody invested in the Singapore market at large.

What’s next?

  • The Fed’s language at its next meeting – scheduled for 17-18 December – will be important to ascertain where it sees rates heading in 2025, with most investors expecting the central bank to cut its interest rate by another 0.25% later this month.

Tim’s Take 

Singapore’s big banks have been getting the love from investors in 2024. That’s understandable as they’ve been consistently posting profit numbers, so far this year, that have blown away the market’s expectations. 

But is that going to change when the US Federal Reserve starts cutting interest rates more in 2025? Maybe not.

We have to remember that banks are “cyclical” stocks in that they move up and down with the economic fortunes of the broader economy. It’s also tied to interest rates and how much they can make on the difference between paying interest on deposits and charging interest on loans.

Known as “net interest income”, also referred to as NII, this is typically their main source of revenue generation but with the Fed starting to cut rates that growth potential is being curtailed. In fact, it’s outright stalling.

If we look at the latest earnings from the big banks, all three had NII growth in Q3 2024 that ranged from a decline of 1% to growth of 2.7%, on a year-on-year basis versus the third quarter of 2023. 

However, that pales in comparison to the growth in “non-interest income” which basically refers to the bank’s other activities, such as investment banking fees, credit cards, and wealth management.

Here, the banks have been absolutely minting it. DBS saw non-interest income increase by 27.7% year-on-year in Q3 2024 and that was the slowest growth out of the trio. OCBC saw 41% year-on-year growth in non-interest income and UOB posted a whopping 70% year-on-year increase in non-interest income.     

Added to the mix is uncertainty around president-elect Trump’s incoming administration in the US. Will his love for tariffs increase inflation and force the Fed to slow its pace of interest rate cuts, thus benefitting banks everywhere (including Singapore)? That’s one big possibility that investors are pondering.

With banks well capitalised, earning money, and growing dividends, it’s no wonder that investors are finding reasons to be optimistic. With the banks offering dividend yields of between 4.9% to 5.5%, investors continue to show love for Singapore’s “Big Three”.

Tim’s Money Tip of the Week

You know that scene in Jerry Maguire where Tom Cruises’ character shouts “SHOW ME THE MONEY”? Well, when we deal with banks and their products in Singapore, we inevitably have to force ourselves to shout “SHOW ME THE DETAILS”.

That’s because, while many banks do have great products to offer us, they also are incentivised to make money given they’re businesses. It’s rather apt that my story of the week concerned banks in Singapore as they’ve been posting record profits on people’s willingness to purchase products from them, from spending on their cards to getting them to manage our money.

But, as is always the case with any product that’s hawked to us, the “devil is in the details”. That’s why, whenever we get a credit card from a bank or whenever we buy a product from a bank, we need to carefully read through the terms and conditions of it.

By understanding whether the product suits our needs is the number one priority. Furthermore, on the credit card side of things, you may not get awarded for spending in the way that you think if you don’t meet the bank’s criteria for spending to earn those bonuses.

While it may seem like a trivial matter – or even a liberal interpretation of the T&Cs – it’s important that we keep a keen eye on any product we use from a bank to understand that we’re getting the best deal for ourselves.