Singapore bank stocks have been in the red as investors remain cautious over the fear of contagion in the technology and financial sectors.
That follows the sudden collapse of Silicon Valley Bank and Signature Bank.
My colleague, Tim, wrote about what led to the second-largest financial institution failure in the US yesterday and, while it might seem like a safe route to follow, the selloff actually represents a buying opportunity for investors.
Investing in bank stocks during such a crisis can be a daunting task but it can also present an opportunity for investors to make a profit over the long term.
While I don’t usually advise on taking such a risk, I think the resilience of Singapore’s economy and its banking sector warrants such a decision.
1. Singapore bank system has insignificant exposure to SVB and Signature Bank
The Monetary Authority of Singapore (MAS) said that the Singapore banking system has “insignificant exposures” to the failed US banks, Silicon Valley Bank (SVB) and Signature Bank.
Both DBS Group Holdings Ltd (SGX: D05) and Oversea-Chinese Banking Corporation (SGX: O39) have said that they have no exposure to SVB, Signature Bank and Silvergate Bank while United Overseas Bank Ltd (SGX: U11) said that the bank has no direct exposure to the three banks.
Singapore’s central bank also said that the banking system in Singapore remains sound and resilient amid the heightened volatility in global financial markets after the closure of both banks.
It noted that the Singapore dollar (SGD) money market and foreign exchange (forex) markets continued to function well and that the banks in Singapore are well-capitalised and that they “conduct regular stress tests against interest rate and other risks”.
“Their liquidity positions are healthy, underpinned by a stable and diversified funding base. These factors will allow them to weather potential stresses from global financial developments,” it said in a statement.
2. Limited exposure to startups
The Singapore banks’ exposure to startups are also limited.
According to DBS Group, the bank has “strong liquidity and a diversified funding base that is supported by a solid retail customer deposit franchise.”
Meanwhile, a UOB spokesperson said that the bank has a sizable and diversified deposits base and added that it has a short-duration and highly-liquid securities portfolio.
While SVB had a large startup client base, Singapore banks’ customer bases tend to be mostly large corporates as well as premium clientele.
3. Beneficiary of rising interest rate environment
While Singapore banks also face bond losses, the majority of their assets are in loans, which allow them to benefit from the rising interest rate environment.
While 57% of SVB’s total assets were in the bond market, Singapore banks’ are less affected by the bond market with only about 12-20% of their total assets in bonds.
In fact, all three Singapore banks have just hit record earnings in their latest financial results amid the expansion of their net interest margins (NIMs).
4. Attractive dividend yield
Singapore banks also have attractive dividend yields, which would fit into the portfolio of long-term investors.
DBS Group, OCBC and UOB have 12-month forward dividend yields of 5.1%, 6.6% and 5.3% respectively.
The current selloff in the market actually allows investors to build up their banking portfolio amid the volatile market.
5. Singapore’s economy remains resilient
Singapore’s economy is expected to remain resilient this year despite the challenging macro environment.
In fact, a survey conducted by MAS shows that the gross domestic product (GDP) of Singapore is expected to grow by 1.9% in 2023, slightly above the previous forecast of 1.8% in December.
The respondents to the survey are also anticipating faster growth in 2024 at 2.5%.
This reflects the confidence in Singapore’s economy, which will benefit the local banking stocks.
Take advantage of an oversold position
While there were concerns if the Singapore banks were too expensive at the beginning of this year, the selloff in the stocks have brought share prices down to more attractive levels.
The current level is similar to what we saw in October last year, which I believe is a good entry level for long-term investors considering the yield on offer, the growth prospects and risks involved.
Given the current oversold position, I believe investors should take advantage of the market panic to buy into the three banking stocks in Singapore.
Disclaimer: ProsperUs Investment Coach Billy Toh doesn’t own shares of any companies mentioned.
