Singapore bank shares chalk up strong gains in H1, but more rotations ahead

Singapore

SHARES of the three Singapore banks gained strongly in the first half of the year, in line with its global peers. But their stocks will see more volatile trading in the second half, as investors make frequent rotations in and out of the sector, a report said.

A market update by the Singapore Exchange (SGX) in early July showed that the local banking trio of DBS, OCBC and UOB averaged a 19 per cent total return in the first half of this year, in line with the median 19.8 per cent return for the 200 largest listed global banks by market value.

At the same time, their average recovery in price-to-book ratios has been almost identical to the top quartile of global banks by market value.

That said, while the Singapore banks average a 15 per cent premium to their book value, their price-to-book ratios remain well off the 40 per cent premium observed back in April and May 2018, SGX said.

For those ratios to come up to the 1.4-times level again, much will depend on the economy - as did the valuations in 2017, which saw Singapore among the strongest advanced economies and also home to one of the strongest performing stock markets across the globe for that year.

Collectively, DBS, OCBC and UOB saw net institutional and net proprietary inflows of S$1.39 billion in Q1 2021 and S$468 million in Q2 2021.

On a sector comparison, stocks of banks were among the strongest in the global stock market in the first half of this year. Their gains outpaced broad global benchmarks, as well as the iron and steel, semiconductor, and the oil-and-gas services segment.

Still, endemic developments, varying outlooks for growth, inflation and monetary policy saw frequent rotations in the sector over the first six months of 2021.

The short-term volatility of DBS, OCBC and UOB - as gauged through the five-day historical volatility of the FTSE ST Banks Index - has consistently gyrated between near 30 per cent highs and 5 per cent lows throughout H1 2021. This has provided for more short-term trading activity, and stock rotations.

For example, between June 16 and June 29, DBS, OCBC and UOB had close to S$350 million of net institutional and net proprietary outflow, averaging a 3.1 per cent decline.

But by the next trading session, the end-of-quarter balance on June 30 showed that institutional investors had broadly added to their Singapore exposures, with the banking trio averaging a 2 per cent gain with more than S$60 million of net institutional and net proprietary inflow, the SGX data showed.

"This served as a timely reminder that the local economic outlook and portfolio country weightings are also key drivers of DBS, OCBC and UOB, which are also the three largest weightings of the STI. The greater amplitude in price swings has seen the short-term five-day historical volatility of the FTSE ST Banks Index increase to above 30 per cent, its highest level in more than six months, and up from the 14 per cent average over H1 2021."

Diverse views on the economic outlook and differing expectations from members of the Federal Open Market Committee have also led to increased volatility in both yield curves and the global banks sector.

For instance, hawkish comments from Fed members sparked the largest outflow for financials in the week through June 23, since March 2020, according to data provider EPFR Global.

SGX added that as economies draw closer to normalisation in H2 2021, "recurring rotations are expected to continue, with investors assessing the daily inroads to 'substantial progress' and effects on accommodative policies".

In the month of July through to July 8, DBS shares have seen increased turnover, contributing 57 per cent of the combined S$256 million in average daily turnover of the banking trio, with the remainder evenly divided between OCBC and UOB, SGX data showed.

This compares with DBS comprising 49 per cent of the combined S$278 million average daily turnover of the trio in H121, with the difference again evenly divided between OCBC and UOB. Over the first six sessions of July, DBS' average daily trading turnover was S$144 million, compared with S$136 million in H1 2021.

OCBC and UOB will both report Q2 results before the market opens on Aug 4, while DBS will round off the reporting season for banks on Aug 5.

DBS closed on Friday at S$30.12, up 24 Singapore cents. OCBC ended at S$12.07, up two cents, while UOB finished at S$26.09, up eight cents.