Update- OCBC Bank, DBS Bank

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Since my last analysis of OCBC bank (here), all three local banks have released their financial year end results. Due to their stellar performances, their share prices have rallied. Since the start of the year, OCBC and UOB share prices have grown by more than 5% while DBS has soared by more than 15%, partially due to a jump in its dividend payout.

Dividend Yield

DBS has announced a dividend payout of $0.60 per share (double from previous year) plus a special dividend of $0.50 and has committed to maintain a yearly gross dividend of $1.20 per share. This has pushed up DBS expected dividend yield to more than 4% per year (based on current share price). The reason why DBS increased its dividend payout was to return excess capital that was built up due to the Basel capital reforms which has since been finalized. I keep my fingers crossed that OCBC and UOB will follow suit to ensure their dividend yield stay "competitive" to DBS dividend yield.

Graph 1: Dividend Yield
Source: OCBC, DBS, UOB

Return on Equity

Another possible reason why DBS would return so much cash back to shareholders is to improve its ROE. From Graph 2, DBS ROE is the lowest among the local 3 banks and has been decreasing for the past 3 years. This means that management is not able to efficiently generate sufficient return from the equity they are holding (e.g. having too much cash but lack of investment opportunity). If there is lack of opportunity to reinvest surplus funds to generate higher returns, then the other option is to return the cash to shareholder. As the formula for ROE is ROE = Net Earnings/Equity, by paying out more cash to shareholders will result in a lower equity and thus higher ROE. Not only that, share price will also be supported in the near term.   

Graph 2: Return on Equity
Source: OCBC, DBS, UOB

Valuation: Price to Book Value (Net Asset Value)

All 3 banks Price to Net Asset Value (NAV) ratio has continued to increase and are currently trading at the highest since 2008 financial crisis. However they have not reached their pre-crisis peak set in year 2006/2007.  

Graph 3: Price-to-book (PB) Ratio
Source: OCBC, DBS, UOB

DBS Historical Valuation

Table 4 is based on DBS historical share price from year 2006 onwards. By adjusting DBS highest historical valuation to current net asset value (NAV), it has once traded at a high of $42.13 before the 2008 financial crisis and a low of $10.61 during the crisis. This is only possible during extreme bullish and bearish market. As for its average trading price over the last 12 years, it is $23.52. With its share price currently at $28.70, it is trading in between its average and +1 standard deviation range. 

Note: The discounted valuation is after deducting its intangible assets. 

Table 4: DBS Price to Net Asset Value
Source: DBS

OCBC Historical Valuation

As for OCBC Bank, it has once traded at a high of $17.61 and a low of $6.19, which also happened before and during the 2008 financial crisis. Currently its share price of $13.06 is also trading at a range between its average and +1 standard deviation. 

Table 5: OCBC Price to Net Asset Value
Source: OCBC

Entry and Exit Strategy

Due to the recent market volatility, I have come to realize that selling shares is really harder than buying. This article (here) has rightfully pointed out my weakness ("Hesitation" under point no. 2). 

I quote:

If you purchased a stock at $40 and it goes to $60, you might be considering selling it. But if the stock retreats to $55, you might say to yourself, "It was just at $60, so I'll wait until it gets back to that."

Then, if the stock goes back to $60, you might say, "It went back to $60, so now maybe it'll go even higher." Then, if it retreats to $50, you might say, "I could have sold at $55; I'll wait for that price."

I have thus decided to formulate an entry and exit strategy for myself. The Price to NAV tables will be a guide for me to understand the banks current valuation as compared to its historical valuation. My strategy will also depends on my entry price. 

Strategy for DBS

I have bought DBS shares only recently and purely for speculation purpose due to its juicy dividend. This means that I do not have much margin of safety and thus will not hold it for long term play. I have set my current stop loss at 5% from recent high which will be at $28.15. If the share price reached a new peak, my 5% stop loss will be based on the new peak price. Of course if market continues to be bullish and reached $36.59 which is 2 standard deviation away from its mean, that will definitely be a sell signal for me.

Strategy for OCBC

As for OCBC, I have set a stop loss of $12. However, my margin of safety for OCBC is huge as I bought it at a very low price during the last market volatility. I might consider not selling it for dividend play unless if it reached the sure exit price of $16.49.  

Table 6: My DBS, OCBC strategy

Now I finally have my battle plan!