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

Geoff Howie

SGX Market Strategist, Equity & Fixed Income

Asia’s leading multi-asset exchange

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.

Equity Bottom-Up

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DBS, OCBC &amp; UOB averaged 4.2% total returns in August, outpacing 1.6% flat median returns of the top quartile of global banking stocks by market value. Similar performance parallels were observed in the 2020 year to 2 Sep, with the trio averaging 18.2% declines, compared to a 20.2% median decline for the top global quartile. 
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DBS and OCBC remain 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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	<li>With the three banks directed to cap FY20 dividend distributions to 60% of FY19 distributions (to bolster ability to swerve credit needs and absorb potential shocks), potential FY20 dividend yields for the three banks could be as high as 3.5% to 4.0%, based on current market prices.  </li>
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Sector-Driven Performances in 2020 YTD 
DBS Group Holdings ("DBS"), Oversea-Chinese Banking Corp ("OCBC") and United Overseas Bank ("UOB") all distributed dividends in August, which saw their average 2.6% price return for the month extended to a 4.2% total return. By comparison, the top quartile of global banking stocks by market value generated a median total return of 1.6% over the month.  As illustrated below, the three banks have outpaced the top quartile of global banking stocks over the past five years.
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 <div class='content-caption'>Total Return</div>
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The three banks have gradually increasing quarterly Net Interest Income to above S$4 billion in 2QFY15 and above S$5 billion in 2QFY18, maintaining a combined Net Interest Income of S$5.4 billion in 2QFY20 as discussed <a href="https://www.sgx.com/research-education/market-updates/20200820-bank-structured-warrants-recently-strengthened">here</a>. 
For the 2020 year to 2 September, accommodative monetary policy and economic lockdowns have meant that global banks have had to contend with a sudden reduction in interest rate margins and overall demand for financing, while needing to boost loan provisions, hence uniform drivers have seen parallel performances of banking sectors across the globe. Key Banking Sector themes continuing into the second half of 2020 include bank  abilities to generate income, tier 1 capital to risk-weighted assets and non-performing loan ratios. Note that on the ability to generate income, the top quartile of global banks with an ROE less than 4% generated a median decline of 30% in the 2020 year to date.     Dividend Yields Remain Competitive 
With the MAS recently directing the three Banks to cap dividends at 60% of FY19 levels “to bolster the ability to continue to support the credit needs of businesses and consumers as well as absorb economic shocks” the maximum dividends amounts for FY20 are as follows:

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<li>As DBS paid S$1.23 in FY19, 60% of this amount is S$0.738 max per share in FY20. Theoretically, if DBS would then save S$1.25 billion from the S$3.145 billion paid in FY19.</li>
	<li>As OCBC paid S$0.53 in FY19, 60% of this amount is S$0.318 max per share in FY20 . Theoretically, OCBC would then save S$924 million from S$2.31 billion paid in FY19. </li>
	<li>As UOB paid S$1.30 in FY19,  60% of this amount is S$0.780 max per share in FY20. Theoretically, this would save S$868 million from S$2.17 billion paid in FY19.</li>
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Based on the above caps, the maximum potential FY20 dividend yields for the three banks could still be as high as 3.5% to 4.0%based on current market prices.  The current median indicative dividend yield for the top quartile of global banks by market value is 4.4%. 
 

FTSE Global Sustainable Yield Index Series 
The FTSE Global Sustainable Yield Index Series is reviewed semi-annually in March and September using data at the close of the last business day of February and August. This means, results of the FTSE Developed Asia Pacific ex Japan Sustainable Yield Index which includes as many as 17 Singapore stocks, are expected to be released within the week. DBS Group Holdings ("DBS"), Oversea-Chinese Banking Corp ("OCBC") have remained in the top 10 constituent weights of the FTSE Developed Asia Pacific ex-Japan Sustainable Yield Index at the end of August. United Overseas Bank ("UOB") and Hong Kong listed CK Hutchison Holdings places were displaced as the 10 heavyweights in August by Korea-listed Hyundai Motor and Hong Kong listed Sun Hung Kai Props. 
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, cash-flow from operations, accruals and changes in leverage. Note that 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>), hence the upcoming rebalance results will be of particular relevance to the Singapore Banking Sector.  To follow the FTSE Index announcements: click <a href="https://www.ftserussell.com/products/index-notices/Home/GetNotices/ALL">here</a>.
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DBS, OCBC &amp; UOB averaged 4.2% total returns in August, outpacing 1.6% flat median returns of the top quartile of global banking stocks by market value. Similar performance parallels were observed in the 2020 year to 2 Sep, with the trio averaging 18.2% declines, compared to a 20.2% median decline for the top global quartile. 
	 
	
DBS and OCBC remain 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.  
	 
	With the three banks directed to cap FY20 dividend distributions to 60% of FY19 distributions (to bolster ability to swerve credit needs and absorb potential shocks), potential FY20 dividend yields for the three banks could be as high as 3.5% to 4.0%, based on current market prices.  

 

Sector-Driven Performances in 2020 YTD  
DBS Group Holdings ("DBS"), Oversea-Chinese Banking Corp ("OCBC") and United Overseas Bank ("UOB") all distributed dividends in August, which saw their average 2.6% price return for the month extended to a 4.2% total return. By comparison, the top quartile of global banking stocks by market value generated a median total return of 1.6% over the month.  As illustrated below, the three banks have outpaced the top quartile of global banking stocks over the past five years.



      
    
    Total Return


The three banks have gradually increasing quarterly Net Interest Income to above S$4 billion in 2QFY15 and above S$5 billion in 2QFY18, maintaining a combined Net Interest Income of S$5.4 billion in 2QFY20 as discussed here.  
For the 2020 year to 2 September, accommodative monetary policy and economic lockdowns have meant that global banks have had to contend with a sudden reduction in interest rate margins and overall demand for financing, while needing to boost loan provisions, hence uniform drivers have seen parallel performances of banking sectors across the globe. Key Banking Sector themes continuing into the second half of 2020 include bank  abilities to generate income, tier 1 capital to risk-weighted assets and non-performing loan ratios. Note that on the ability to generate income, the top quartile of global banks with an ROE less than 4% generated a median decline of 30% in the 2020 year to date.      Dividend Yields Remain Competitive  
With the MAS recently directing the three Banks to cap dividends at 60% of FY19 levels “to bolster the ability to continue to support the credit needs of businesses and consumers as well as absorb economic shocks” the maximum dividends amounts for FY20 are as follows:


As DBS paid S$1.23 in FY19, 60% of this amount is S$0.738 max per share in FY20. Theoretically, if DBS would then save S$1.25 billion from the S$3.145 billion paid in FY19.
	As OCBC paid S$0.53 in FY19, 60% of this amount is S$0.318 max per share in FY20 . Theoretically, OCBC would then save S$924 million from S$2.31 billion paid in FY19. 
	As UOB paid S$1.30 in FY19,  60% of this amount is S$0.780 max per share in FY20. Theoretically, this would save S$868 million from S$2.17 billion paid in FY19.

 

Based on the above caps, the maximum potential FY20 dividend yields for the three banks could still be as high as 3.5% to 4.0%based on current market prices.  The current median indicative dividend yield for the top quartile of global banks by market value is 4.4%.   
 

FTSE Global Sustainable Yield Index Series  
The FTSE Global Sustainable Yield Index Series is reviewed semi-annually in March and September using data at the close of the last business day of February and August. This means, results of the FTSE Developed Asia Pacific ex Japan Sustainable Yield Index which includes as many as 17 Singapore stocks, are expected to be released within the week.  DBS Group Holdings ("DBS"), Oversea-Chinese Banking Corp ("OCBC") have remained in the top 10 constituent weights of the FTSE Developed Asia Pacific ex-Japan Sustainable Yield Index at the end of August. United Overseas Bank ("UOB") and Hong Kong listed CK Hutchison Holdings places were displaced as the 10 heavyweights in August by Korea-listed Hyundai Motor and Hong Kong listed Sun Hung Kai Props.  
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, cash-flow from operations, accruals and changes in leverage. Note that 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), hence the upcoming rebalance results will be of particular relevance to the Singapore Banking Sector.   To follow the FTSE Index announcements: click here.



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Singapore Banks Amongst August Advancers

DBS, OCBC & UOB averaged 4.2% total returns in August, outpacing 1.6% flat median returns of the top quartile of global banking stocks by...

Singapore Exchange Ltd (SGX)