MQTrader Education Series
MQ Trader - Singapore banking giants strive for new highs despite Covid-19, with DBS leading the charge
MQTrader Jesse
Publish date: Wed, 01 Dec 2021, 04:13 PM
Singapore banking giants strive for new highs despite Covid-19, with DBS leading the charge
To give you a better idea of how hard Covid hit the global economy, governments worldwide are on the verge of becoming more indebted than ever, surpassing any moment in recent history, including World War II.
Chairman of the Federal Reserve, Jerome Powell, said it well. During the pandemic, massive government and corporate borrowings served as a "bridge" across economic divides such as lockdowns, falling consumer spending, idle cruise ships, empty hotels, and millions of unemployed people. It enables businesses to pay employees who are still in employment and preserve assets in functioning order. In addition, unemployment benefits for the unemployed could help and ease the burden of a sudden loss of income. With this massive borrowing, the global debt has added $19.5 trillion due to the Covid-19 Pandemic.
Singapore's overall resilience against the pandemic
Mr. Ravi Menon, Managing Director, Monetary Authority of Singapore, said in an interview that "It ain't about how hard you hit, it is about how hard you can get hit, and keep moving forward." How resilient is Singapore during this crisis? We can discuss resilience in four categories:
- Economic resilience
- Financial system resilience
- Technology and digitalization
- Jobs resilience
Particularly the financial system resilience that has played a vital role in the overall resilience of Singapore. Not just in Singapore, but many other countries as well. Thanks to the economic and regulatory system that reformed over the last ten years. The banking systems are well-capitalized, highly liquid, have low leverage levels, and much more robust risk management. And this time, to the extent that finance can be part of the solution.
One of the factors that softened the pandemic's impact is strong bank performance, DBS even achieved a new all-time high
The financial system has played a significant role in resilience and supported the economy during the crisis. Globally, the Bank Sector has been among the strongest performing stock sectors in the 2021 YTD, generating similar returns to the Energy Sector. For example, in Singapore, DBS, OCBC, and UOB, which have ranked amongst the ten largest ASEAN bank stocks over the past 20 years, have averaged 23% total returns in the 2021 YTD.
We realize that even during the COVID-19 pandemic, the top 3 Singapore banks, DBS, OCBC, and UOB, can increase their net profit compared to FYE 2020. DBS even achieves a new all-time high.
How did Singapore Banks perform so well even during the pandemic?
Interest rate expectations have been the main driving force for international banking stocks in 2021. From the FOMC on September 22 to October 13, the 2/10 U.S. yield curve steepened by 17 basis points, while the Bloomberg World Bank Index rose 4.4% in Singapore dollars, DBS Bank rose 4.1%, and OCBC Bank rose 4.0%, United Overseas Bank rose 4.9%. Although the 20-year long-term returns of DBS, OCBC, and UOB are similar, as international industry trends, regional growth, and digitalization become common driving factors, the increased economic normalization in 2021 has seen more recent variances in net institutional flows and comparative returns.
The three major banks' combined wealth management net fee and commission income increased from nearly S$700 million in the first half of 2014 to almost S$2 billion in the first half of 21, an increase of approximately three times. Singapore was ranked second in competitiveness and performance in the 2018 Deloitte Industry Report as an international wealth management center, reflecting that all bank management has excellent operational and decision-making capabilities for their banks. As a result, no matter how bad the external factors are, the management can still lead the company to maintain development.
Evergrande is not an issue to Singapore
Singapore's senior minister, Tharman Shanmugaratnam, said on Monday (October 4) that Singapore's bank's loan exposure to the heavily indebted Chinese real estate giant Evergrande was "insignificant" as Singapore's banking system do not"not much exposure" to the entire Chinese real estate industry.
In a written reply to the parliamentary question about Evergrande's debt crisis and whether it will affect Singapore's financial institutions, the direct exposure to the Chinese real estate industry is less than 1% of non-bank loans.
The new norm, living with Covid and how will it affect the economy and banks
As PM Lee Hsien Loong announces the new living with Covid-19 strategy, Singapore's economy will reopen, and businesses will return to normal soon. The economy returning to normal is a good sign for the banking industry because when the crowds begin to move towards the business districts, people will spend money, which will drive the flow of money. The flow of money will once again push the overall economic development, and the banking industry will be able to benefit from the flow of money.
As the economy progressively returns to normal, Singapore's central bank has begun to prepare against the rising inflation risks. Singapore's central bank is closely watching whether there are signs that price increases will become a persistent problem rather than a temporary problem caused by the pandemic. Because of signs that supply chain and labor market disruptions are pushing up consumer prices, the Monetary Authority tightened its monetary policy last month in order to give a helping hand and offset the rising cost of living for local consumers. Prices can be lowered by tightening policies; in other words, inflation can be controlled. Singapore's overall inflation rate in October had reached an eight-year high as of November 23, 2021. The core inflation rate has risen to its highest level in three years, boosted by increases in car prices and rentals. Both benchmarks are increasing at a quicker rate than economists anticipated.
In its tightening move, the Monetary Authority of Singapore (MAS) slightly raised the slope of its Singapore dollar nominal effective exchange rate (S$NEER) policy band, up from zero percent previously.
Now, Singapore expects its economy to grow faster than previously predicted as vaccinations gain speed, allowing for more economic activity and boosting demand for goods and services at home and in some of its key markets abroad. The Ministry of Trade and Industry (MTI), on August 11, 2021, upgraded its gross domestic product (GDP) growth forecast range for 2021 to 6 percent to 7 percent. The better-than-expected economic performance in the first half of the year also supported the forecast of faster growth, when GDP grew by 7.7% over the first six months of 2020.
Our final thoughts
It's like what Mr. Ravi Menon, Managing Director of MAS said, "You've taken the punch; how are you bouncing back?" With economies reopening and banks performing more robust than ever, we believe that Singapore is undoubtedly bouncing back and bouncing back vigorously.
Want to venture into a market that has global exposure and diversify your portfolio?
Open trading account now with MQ Trader to start trading in SGX!
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