DBS, OCBC and UOB’s recent rally a remarkable recovery, but are the risks fully priced in?

[SINGAPORE] Shares of DBS, OCBC and UOB have rebounded since the announcement of US President Donald Trump’s reciprocal tariffs on Apr 2 sent shockwaves through the markets and triggered a massive sell-off.

Over the past two weeks since Apr 7, the banks have climbed around 8.2 per cent on average, although they have not recovered all their losses.

This strong performance comes despite flip-flopping tariff announcements from the White House that are wreaking havoc on market sentiment. Just this week, the US slapped new duties as much as 3,521 per cent on solar imports from four South-east Asian countries.

Yet, the lenders continue to ascend. But investors thinking of jumping on the Singapore banks bandwagon must do so cautiously.

Market volatility is expected to continue, as macroeconomic and geopolitical uncertainties persist.

Already, major stock indices in the US have whiplashed. The Dow Jones Industrial Average has dropped 7.2 per cent since Apr 2, while the S&P 500 is down 6.8 per cent and the Nasdaq Composite Index has lost 7.4 per cent.

Economists are also warning of a global economic slowdown, as the US tariffs decimate export demand and manufacturing activity. For the banks, this could affect trade and working capital loan demand.

Investment loan demand could also slow, as companies take a wait-and-see approach amid the uncertainty.

A softening in loan volume growth would impact net interest income and net interest margins, which is already expected to fall further as Trump puts pressure on US Federal Reserve chair Jerome Powell to cut interest rates.

While there has been talk that Trump was keen to oust Powell, the latest on Apr 22 came as Trump declared that he had not intention of firing the Fed chair.

Apart from the outlook for rates and loans, there is also the risk that fees from wealth management and credit cards could slow down amid higher unemployment risks and risk-off attitudes.

The banks could also face significantly higher asset quality risks should the situation worsen.

In a nutshell, expect plenty of volatility and plenty of risk as the world gets jerked around on this “Trumpoline”.

While the trio of local banks have rallied recently, they are still underperforming.

Year to date, the banks have generated total returns of minus 0.7 per cent. In comparison, the benchmark Straits Times Index has logged a positive total return of 2 per cent.

The banks may have scaled new heights, but Maybank Securities and RHB Group Research recently downgraded the banks sector to “neutral”; the research houses have also downgraded some individual bank stocks and cut their target prices.

So what is propping up the banks’ share prices? One reason could be their respective promises, announced in February at their FY2024 results, to return capital to shareholders.

DBS pledged a capital return divided of S$0.15 per share to be paid out each quarter over 2025, and expects to pay out a similar amount of capital in the next two years. This came after the bank last year announced a S$3 billion share buyback programme.

UOB proposed a special dividend of S$0.50 per share over two tranches in 2025 – paying out S$800 million of the bank’s surplus capital – and introduced a S$2 billion share buyback programme.

Meanwhile, OCBC announced plans to return S$2.5 billion of capital to shareholders over two years via special dividends and share buybacks.

For investors, this makes the banks quite attractive as it means higher yield.

RHB, for instance, forecasts the banks to register dividend yields of between 6 and 7.5 per cent for FY2025. Maybank estimates put these at between 6.2 and 8.1 per cent. In contrast, yields for Singapore’s Treasury bills (T-bills) have collapsed.

The cut-off yield for the latest six-month T-bill fell to 2.5 per cent, while that for the latest one-year T-bill tumbled to 2.29 per cent.

The risk premium is tantalising. But investors must judge for themselves their own risk appetites.

Should things go south, there is plenty more room for the banks to fall – as history tells us.

During the global financial crisis of 2008, for example, the Singapore lenders saw a steep 59 per cent drop in their share prices from peak to trough, data compiled by RHB showed.

During the onslaught of the Covid-19 pandemic in 2020, the peak-to-trough drop was 34 per cent.

On average, the trio of banks is now trading around just 7.4 per cent lower than their most recent peaks.

If conditions worsen, this could suggest a potential downside of more than 25 per cent from current levels.

And for most investors, this should give reason for pause.