Singapore Exchange Ltd (SGX)

Singapore Exchange is Asia’s leading and trusted market infrastructure, facilitating the exchange of capital and ideas to create value for people, businesses and economies. As a multi-asset exchange operating equity, fixed income and derivatives markets to the highest regulatory standards, SGX is a vertically integrated business that provides listing, trading, clearing, settlement, depository and data services.

With about 40% of listed companies and over 80% of listed bonds originating outside of Singapore as well as established linkages across the region and in Europe, SGX is Asia’s most international and connected exchange. Offering a full suite of derivatives products across Asian equity indices, commodities and currencies, SGX is the world’s most liquid international market for the benchmark equity indices of China, India, Japan and ASEAN.

As Asia’s pioneering central counterparty, SGX is globally recognised for its risk management and clearing capabilities, and was one of the first globally to adopt the Principles for Financial Market Infrastructure.

Headquartered in AAA-rated Singapore, SGX has over 800 employees including offices in Beijing, Chicago, Hong Kong, London, New York, Mumbai, San Francisco, Shanghai and Tokyo.

Asia’s leading multi-asset exchange

SGX Market Strategist, Equity & Fixed Income, Singapore Exchange Ltd (SGX)

Geoff Howie

SGX Market Strategist, Equity & Fixed Income

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DBS, OCBC and UOB are amongst the top ten constituents of the FTSE Developed Asia Pacific ex Japan Sustainable Yield Index. Constituents meet financial and operating strength criteria, with emphasis on strong balance sheets and ability to generate cash flow.  
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The three banks all maintain an indicative dividend yield above 4.0%, currently averaging 4.5%, with DBS distributing dividends on a quarterly basis, and OCBC and UOB distributing dividends on a semi-annual basis. 
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	<li>The three banks averaged 9% YoY net profit growth 1HFY19, following average net profit growth of 19% in FY18. Average ROE was at 12.5% in 1HFY19 with average NIM at 1.82%. The three banks also averaged 7.8% annualised total returns over the past five years. </li>
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DBS Group Holdings ("DBS"), Oversea-Chinese Banking Corp ("OCBC") and United Overseas Bank ("UOB") are amongst the ten largest weights of a number of indices, including the Straits Times Index (“STI”), FTSE ASEAN All-Share Index and FTSE Developed Asia Pacific ex Japan Sustainable Yield Index. 

Together the three stocks average an indicative dividend yield of 4.5%, providing an important cornerstone for Singapore’s comparatively high yields as discussed in the recent SGX My Gateway Report <a href="https://bit.ly/2ZflLhX">here</a>. The average indicative dividend yield of the three banks at the end of each month has remained above 4.0% since the end of October 2018.  
<figure>
 <img src="https://api2.sgx.com/sites/default/files/2019-08/Indicative%20Div%20Yields.png" alt="Indicative Div Yield">
 </figure>
 <div class="content-caption">Indicative Div Yield</div>
Source: Bloomberg (Data as of 19 August 2019)

Sustainable Yield Screening Puts DBS, OCBC, UOB in High Ranking

The FTSE Global Sustainable Yield Index Series examines the financial and operating strength of prospective constituents with specific emphasis on companies with strong balance sheets and the ability to generate cash flow. Financial and operational strength metrics include Return on Assets (“ROA”), change in ROA, cash-flow from operations, accruals and changes in leverage. Other screening criteria include the pay-out ratio and incidence of historic or forecast dividend cuts (for the Factsheet and more detailed methodology, click <a href="https://www.ftserussell.com/products/indices/sustainable-yield?utm_source=MG&amp;utm_medium=EDM&amp;utm_campaign=alwayson&amp;utm_term=180219&amp;utm_content=HOTW">here</a>).

The FTSE Developed Asia Pacific ex Japan Sustainable Yield Index comprises 143 stocks which includes 16 Singapore stocks.  DBS maintains the fifth largest weight within the index, with OCBC the sixth largest weight and UOB the tenth largest weight. Together the three banks maintained as much as 8.7% of the Index weight as of July 31.

Singapore’s three listed local banks maintain a combined market capitalisation of S$151 billion. Combined the three banks traded an average daily turnover of S$230 million over the first seven months of 2019, while averaging a 10.0% total return over the period.

DBS, OCBC &amp; UOB Averaged 9% YoY Net Profit Growth in 1HFY19

For their 1HFY19 (ended 30 June), DBS, OCBC &amp; UOB have reported an average 9% YoY increase in net profit. As detailed in the table below, combined, the three banks reported total income (pre allowances, expenses, and taxes) of S$17.5 billion for the 1HFY19. This was up from S$15.9 billion for the 1HFY18 and $14.5 billion in 1HFY17.
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 <img src="https://api2.sgx.com/sites/default/files/2019-08/Stock%20Table.PNG" alt="Net Income Table">
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 <div class="content-caption">Net Income Table</div>
The average Net Interest Margin (“NIM”) for the three banks in 1HFY19 was 1.82%, up from 1.78% in 1HFY18. NIM represents annualised net interest income as a percentage of total interest bearing assets.
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 <img src="https://api2.sgx.com/sites/default/files/2019-08/Net%20Interest%20Margins.PNG" alt="Net Interest Margins ">
 </figure>
 <div class="content-caption">Net Interest Margins </div>
Net interest income increases have coincided with gradual increases of interest rates as represented by the 1-month Swap Overnight Rate (“SOR”) and 3-month Singapore Interbank Offered Rate (“SIBOR”) month. SIBOR reflects the benchmark interest rates in Singapore, while the SOR is a synthetic rate that takes into account exchange rate of the Singapore Dollar to the US Dollar.
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 <img src="https://api2.sgx.com/sites/default/files/2019-08/Quarterly%20Net%20Interest%20income.png" alt="Quarterly Net Interest income">
 </figure>
 <div class="content-caption">Quarterly Net Interest income</div>
Source: Financial Reports &amp; Bloomberg

Recent ROE Growth &amp; Comparative Valuations

The average Return on Equity (“ROE”) for the three banks stood at 12.5% for 1HFY19, up from 12.1% in 1HFY18, and up from 10.4% in 1HFY17. ROE measures a corporation's profitability by revealing how much earnings a business generates with the money shareholders have invested. 

The average price-to-book (P/B) of the three banks is currently 1.1x, which ranges from 1.0x for OCBC to 1.3x for DBS. By comparison the five year average P/B for the three banks is 1.2x. The P/B ratio compares the company’s value on the market relative to its book value.

Average Daily Moves &amp; DLC Participation

The three stocks averaged intraday 1 minute annualised volatility of 12.4% over the first seven months of 2019, compared to an average of 18.2% for the remaining STI stocks. This means that on average the three banks, with very similar volatility profiles, averaged 1.1% daily trading ranges between high and low for the period.

In the August month-to-date, the 5x Long and Short DBS Daily Leveraged Certificates (“DLC”) and 5x Short UOB DLC were amongst the top five traded single stock DLCs. The basic principle of a single stock DLC is that if the underlying asset moves by 1% from its closing price of the previous trading day, the value of a 5x DLC will move by 5%. DLCs are designed to be traded over short periods of time by sophisticated investors, predominantly on an intra-day basis – more on DLC application and risks can be found <a href="https://www2.sgx.com/research-education/securities-products#Daily%20Leverage%20Certificates">here</a>.

Recent Sector Assessment

Last month the IMF noted in the 2019 Article IV Consultation (click <a href="https://www.imf.org/en/Publications/CR/Issues/2019/07/15/Singapore-2019-Article-IV-Consultation-Press-Release-Staff-Report-and-Statement-by-the-47119">here</a>) that Singapore’s financial sector performance has been strong, in particular:

<ul>
<li>The 2019 Financial Sector Assessment Program (FSAP) found that Singapore bank capital ratios continued to exceed regulatory minima with comfortable margins.</li>
	<li>Non-performing loans remained low and stable (1.5% for local banks at the end of 2018) and bank profitability was healthy.</li>
	<li>The loan-to-deposit ratio in domestic currency stood at 88% at the end of 2018, but the FX loan-to deposit ratio remained significantly higher at 128%.</li>
	<li>With relatively muted credit growth, household debt was stable (about 70% of GDP), and households continued to maintain sizeable positive net asset positions (at about 380% of GDP).</li>
</ul>
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DBS, OCBC and UOB are amongst the top ten constituents of the FTSE Developed Asia Pacific ex Japan Sustainable Yield Index. Constituents meet financial and operating strength criteria, with emphasis on strong balance sheets and ability to generate cash flow.   
	 
	
The three banks all maintain an indicative dividend yield above 4.0%, currently averaging 4.5%, with DBS distributing dividends on a quarterly basis, and OCBC and UOB distributing dividends on a semi-annual basis.  
	 
	The three banks averaged 9% YoY net profit growth 1HFY19, following average net profit growth of 19% in FY18. Average ROE was at 12.5% in 1HFY19 with average NIM at 1.82%. The three banks also averaged 7.8% annualised total returns over the past five years. 

DBS Group Holdings ("DBS"), Oversea-Chinese Banking Corp ("OCBC") and United Overseas Bank ("UOB") are amongst the ten largest weights of a number of indices, including the Straits Times Index (“STI”), FTSE ASEAN All-Share Index and FTSE Developed Asia Pacific ex Japan Sustainable Yield Index. 

Together the three stocks average an indicative dividend yield of 4.5%, providing an important cornerstone for Singapore’s comparatively high yields as discussed in the recent SGX My Gateway Report here. The average indicative dividend yield of the three banks at the end of each month has remained above 4.0% since the end of October 2018.  

      
    
    Indicative Div Yield
Source: Bloomberg (Data as of 19 August 2019)

Sustainable Yield Screening Puts DBS, OCBC, UOB in High Ranking

The FTSE Global Sustainable Yield Index Series examines the financial and operating strength of prospective constituents with specific emphasis on companies with strong balance sheets and the ability to generate cash flow. Financial and operational strength metrics include Return on Assets (“ROA”), change in ROA, cash-flow from operations, accruals and changes in leverage. Other screening criteria include the pay-out ratio and incidence of historic or forecast dividend cuts (for the Factsheet and more detailed methodology, click here).

The FTSE Developed Asia Pacific ex Japan Sustainable Yield Index comprises 143 stocks which includes 16 Singapore stocks.  DBS maintains the fifth largest weight within the index, with OCBC the sixth largest weight and UOB the tenth largest weight. Together the three banks maintained as much as 8.7% of the Index weight as of July 31.

Singapore’s three listed local banks maintain a combined market capitalisation of S$151 billion. Combined the three banks traded an average daily turnover of S$230 million over the first seven months of 2019, while averaging a 10.0% total return over the period.

DBS, OCBC &amp; UOB Averaged 9% YoY Net Profit Growth in 1HFY19

For their 1HFY19 (ended 30 June), DBS, OCBC &amp; UOB have reported an average 9% YoY increase in net profit. As detailed in the table below, combined, the three banks reported total income (pre allowances, expenses, and taxes) of S$17.5 billion for the 1HFY19. This was up from S$15.9 billion for the 1HFY18 and $14.5 billion in 1HFY17.

      
    
    Net Income Table
The average Net Interest Margin (“NIM”) for the three banks in 1HFY19 was 1.82%, up from 1.78% in 1HFY18. NIM represents annualised net interest income as a percentage of total interest bearing assets.

      
    
    Net Interest Margins 
Net interest income increases have coincided with gradual increases of interest rates as represented by the 1-month Swap Overnight Rate (“SOR”) and 3-month Singapore Interbank Offered Rate (“SIBOR”) month. SIBOR reflects the benchmark interest rates in Singapore, while the SOR is a synthetic rate that takes into account exchange rate of the Singapore Dollar to the US Dollar.

      
    
    Quarterly Net Interest income
Source: Financial Reports &amp; Bloomberg

Recent ROE Growth &amp; Comparative Valuations

The average Return on Equity (“ROE”) for the three banks stood at 12.5% for 1HFY19, up from 12.1% in 1HFY18, and up from 10.4% in 1HFY17. ROE measures a corporation's profitability by revealing how much earnings a business generates with the money shareholders have invested. 

The average price-to-book (P/B) of the three banks is currently 1.1x, which ranges from 1.0x for OCBC to 1.3x for DBS. By comparison the five year average P/B for the three banks is 1.2x. The P/B ratio compares the company’s value on the market relative to its book value.

Average Daily Moves &amp; DLC Participation

The three stocks averaged intraday 1 minute annualised volatility of 12.4% over the first seven months of 2019, compared to an average of 18.2% for the remaining STI stocks. This means that on average the three banks, with very similar volatility profiles, averaged 1.1% daily trading ranges between high and low for the period.

In the August month-to-date, the 5x Long and Short DBS Daily Leveraged Certificates (“DLC”) and 5x Short UOB DLC were amongst the top five traded single stock DLCs. The basic principle of a single stock DLC is that if the underlying asset moves by 1% from its closing price of the previous trading day, the value of a 5x DLC will move by 5%. DLCs are designed to be traded over short periods of time by sophisticated investors, predominantly on an intra-day basis – more on DLC application and risks can be found here.

Recent Sector Assessment

Last month the IMF noted in the 2019 Article IV Consultation (click here) that Singapore’s financial sector performance has been strong, in particular:


The 2019 Financial Sector Assessment Program (FSAP) found that Singapore bank capital ratios continued to exceed regulatory minima with comfortable margins.
	Non-performing loans remained low and stable (1.5% for local banks at the end of 2018) and bank profitability was healthy.
	The loan-to-deposit ratio in domestic currency stood at 88% at the end of 2018, but the FX loan-to deposit ratio remained significantly higher at 128%.
	With relatively muted credit growth, household debt was stable (about 70% of GDP), and households continued to maintain sizeable positive net asset positions (at about 380% of GDP).




Profit Growth Sustains Dividend Yields of DBS, OCBC & UOB