DBS is scheduled to be the last bank among the 3 giants to announce its Q3FY19 results on the 11th November 2019.
The other two banks will report on 1st Nov (UOB) and 5th Nov (OCBC) respectively.
As some of you might know, I have a short-sell
position for DBS in my earlier October Portfolio Update
and have since more than tripled
my position further in DBS in the past recent days.
Here are 6 reasons why I think DBS is prime for shorting, especially in the build up for the next few weeks / months.
1.) SIBOR Rates has peaked in Jun 2019 and are heading down
The 3m and 1m Sibor rates have peaked in Jun 2019 when they announced their 2nd quarter results.
Since then, the Federal Reserve has proceed cutting the interest rates by 25 basis points in each of the two occassions.
This has led the SIBOR rates to come down in the next few months based on what we see from Jul to Oct, which will evidently trickle down to the bank’s NIM results.
A lot of people remember the part where banks have been reporting solid year on year growth, but this is because they start from a very low base where QE infinity has been evident almost in the last 10 years.
Party days are almost over, banks will start reporting slower growth in the next few quarterly results, starting from Q3.
2.) NIM is a lagging indicator and has likely peaked in Q2
Net Interest Margin (NIM) is essentially the main backbone earnings for the banks.
It takes up more than two-thirds (around 64% to 66%) of the overall revenue for the banks.
It is a profitability indicators showing how much the bank earns on the interest from its products which includes loans, mortgages, compared to the interests it pays out to consumers on the savings accounts.
NIM is usually a lagging indicator for the banks (usually between 3 to 6 months), as it tends to reprice their rates in relation to how the SIBOR moves in order to remain competitive.
|DBS’s NIM in the last 10 quarters
Based on the above graph that we see for DBS’ NIM in the last 10 quarters, it appears that NIM has peaked in Q2 2019.
The declining SIBOR (see point 1) from Jul to Oct 2019 will likely mean that the banks’ NIM rate is likely to decline in Q3, though likely they will still exhibit year on year growth.
If we start seeing NIM slowly going back to the 1.80ish% and 1.70%ish, it will likely show negative year on year growth for the banks.
3.) Mortgage & Construction Loans will continue to drag
Mortgage Housing & Construction loans took up the highest percentage of loans for DBS in terms of industries.
In third place, manufacturing sectors took the place.
As we all know, developers have a hard time selling their newly launched units on the primary market due to the cooling measures that was strictly imposed to home buyers.
As a result, what we have is excess baggage inventory of unsold units that will flood the markets with its “not-so-cheap” price tag.
With banks trying to win consumers on the refinancing segment, this will push rates down competitively, which will be a double hit since SIBOR is coming down.
4.) General Provision Allowances Have Increased
One good metrics to know if cracks in the economy are starting to show is to look at the general provision on the allowances that banks typically does (and also the NPL of course).
While NPL is still showing a healthy 1.5% compared to the 1.9% we see back in 2016, banks are starting to show some conservativeness by putting in more allowances in their books, in preparation of a tough 2020 year to come.
Some of the sectors that see an increase in provision is the manufacturing sectors (QoQ) while almost all the other sectors including construction and housing, e-commerce, transportation are exhibiting year on year increase in allowances.
5.) DBS’ Rich Valuations only held up because of its $1.20 dividends
DBS’ rich valuations of P/BV 1.4x is unlikely to be warranted at the current market if not for the fact that the Group decides to increase its payout ratio to above 50% from 2017 onwards.
Since then, the market has priced in valuations based on what they think is sustainable yields at 5%, which is attractive especially for yield-hungry investors.
Previously before the hike, banks are trading at sub-par 3%ish and markets are valuing the banks lower.
Having said that, I think the $1.20 dividends / year are sustainable for now because of the competitive CET-1 operating metrics that are above 13.5% (management has previously guided that for as long as CET-1 is above 13% dividends are safe), though we should continue to keep a lookout for any developing updates on this metrics.
6.) If Dragonfly Doji (candlestick) doesn’t hold today……
On the 17th Oct, DBS exhibits a Dragonfly Doji candlestick pattern where they open higher, but was pushed on a sell-down during the mid day to $24.66, but managed to gap up strongly at the close.
While this signals a positive uptrend reversal, a confirmation is required on the 18th Oct (today) if demand can continue to push up and end the day strongly.
Likely the case is that we probably won’t see that happening today due to the China GDP’s info which disappoints this morning and pushed the whole market down.
The next two quarters results on high level will still look great for banks as they are likely to report high single digit earnings due to the lower base of 2018 earnings.
But the outlook will be very much tougher as we already see almost all operating metrics showing up to be what will be a difficult year for banks come 2020 when they start comparing against a strong 2019 peak earnings.
Until then, I think banks will continue to struggle and they are likely to be pushed further down from their current valuations that the market is still not realizing the impact.
Thanks for reading.