Banking is a great business.
A bank takes in money from depositors, guaranteeing the safety of their savings and paying them interest. Then it lends out those deposits to individuals and businesses at a higher rate of interest.
The difference is its profit.
Of course, in practice, this is a lot more complicated. There are dozens of ways that banks can generate income. And they can raise funds from many different sources – not just customer deposits.
But the basic business model still holds. And banks in Singapore are doing it right.
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Singapore has some of the world’s best banks
I’ve written about Singaporean banks before (here). They are some of the most profitable, safest and innovative banks in the world.
Singapore’s top three banks are DBS Group (Exchange: Singapore; ticker: D05), Oversea-Chinese Banking Corporation (Exchange: Singapore; ticker: O39) and United Overseas Bank (Exchange: Singapore; ticker: U11).
They have a combined market capitalisation of US$113 billion – which together is one-third the size of JPMorgan Chase (Exchange: New York; ticker: JPM).
But the return on equity (ROE) of Singapore’s three largest banks is higher than that of the biggest U.S. banks.
(ROE is a key profit indicator for banks. It’s the amount of return generated each year relative to the amount of equity available to the company. In the banking industry, companies typically strive to achieve an ROE of at least 10 percent.)
DBS, Oversea-Chinese Banking Corporation and United Overseas Bank have ROEs of 11.6, 11.1 and 10.8 percent, respectively.
By contrast, the ROEs of the three largest U.S. banks are 10.3 percent for JPMorgan Chase, 10.1 percent for Wells Fargo (Exchange: New York; ticker: WFC) and just 8 percent for Citigroup (Exchange: New York; ticker: C).
Other major global banks are even less profitable. Hong Kong and Shanghai Banking Corporation (Exchange: Hong Kong; ticker: 5), or HSBC, has an ROE of only 6.7 percent, while BNP Paribas has an ROE of 7.9 percent.
Singaporean banks are also way ahead in terms of efficiency, as measured by their cost-to-income ratio. This is the bank’s operating expenses divided by its operating income.
The three big Singapore banks spend about US$4 for every US$10 in income. Meanwhile, the biggest U.S. banks spend between US$5 and US$6.
Singapore’s three largest banks are also among the safest banks in the world. According to Global Finance’s “World’s Safest Banks 2018” rankings, DBS, OCBC and UOB rank among the top 20 safest banks globally.
But there’s another thing Singapore banks are great at.
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When I started banking internationally in the late ‘90s, doing business with HSBC was an easy choice to make.
You could just walk into its head office along Queens Road in Central, Hong Kong, and present a valid passport (if you were a foreigner) along with a few thousand dollars to open an account.
Today, you’ll be bombarded with so many questions about your intentions of opening an account, that you feel like a criminal – and need to prove your innocence.
Banks like HSBC that alienate small customers run the risk of leaving a lot of business (and money) on the table.
By contrast, Singapore is one of the remaining financial hubs where you can still walk into a bank and open an account without feeling like a fugitive.
If you have an offshore business in a tax-free jurisdiction, you can open a business bank account with just US$35,000 (including the required minimum deposit). If you don’t, opening a business in Singapore takes as little as a day.
Deposits are soaring as a result.
OCBC, for instance, saw its deposits jump 39 percent between 2013 and 2018. DBS Group experienced a 35 percent increase in deposits, while UOB had a similar gain in deposits.
Their net interest margins (the difference between the interest it pays for deposits and the interest it charges to customers) have also been stable throughout the past five years, while profits have been steadily rising.
Their shares are reflecting this.
As you can see in the chart below, over the past five years, the shares of each of Singapore’s three biggest banks have trounced the performance of HSBC by a huge margin. And by the looks of it, they’ll continue to do so in the foreseeable future.
So if you’re looking to invest in banking stocks (or just open up an account), Singapore’s banks should be on the top of your list.
A great way to invest in Singapore’s three banks is through shares of the SPDR Straits Times Index ETF (Exchange: SGX; ticker: ES3).
Its top three holdings, comprising 39.8 percent of its total assets, are Singapore’s three largest banks. The ETF also pays a 3.6 percent dividend yield, which is higher than the yield of most 10-year government bonds.
Another way to gain exposure is through the iShares MSCI Singapore ETF (NYSE; ticker: EWS). It also counts Singapore’s three largest banks as its three largest holdings, with a 44.4 percent total weighting, and carries a yield of 3.7 percent.
Editor, Stansberry Pacific Research