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Join The Motley Fool Singapore’s David Kuo every week on his new “Investing in Asia podcast”, available for download on iTunes, Spotify and Stitcher. He will be providing his insights and expertise as an investor in Asia, home to some of the world’s most dynamic and fast-growing countries.
In this episode, David stays closer to home and meets up with The Motley Fool Singapore analyst Ser Jing Chong. They talk all things Singapore; Bak Kut Teh, Balestier and, most importantly, banks. David and Ser Jing discuss Singapore’s “Big Three” banks, how they compare to overseas banking sectors and why they offer overseas investors a great diversification option in their portfolios.
David Kuo (DK): Hello, Asia. Greetings, world. This is Investing in Asia — your weekly investing podcast from Motley Fool Asia — broadcasting from the island of Singapore, just one degree north of the equator. I am David Kuo and last week we looked at Malaysia. This week we are heading south to Singapore and I am joined by Singapore Stock Advisor analyst Chong Ser Jing. Welcome to Investing in Asia, Ser Jing.
Ser Jing Chong (SJC): Hello, David. Thank you for having me.
DK: It’s a pleasure to talk to you all the time. Can you tell us a little bit about where you are at the moment, Ser Jing?
SJC: I’m actually in Balestier right now, which is located in the south-central part of Singapore. There are some famous eateries near me. Some of the famous dishes in Balestier include Bak Kut Teh (peppery soup made of pork ribs), and Tau Sar Piah, which is a pastry containing a filling made out of a savory and sweet, thin paste.
DK: Do you know why your area is called Balestier?
SJC: Yes, interestingly, the area is actually named after an American named Joseph Balestier. According to Wikipedia, he was Singapore’s first American consul from 1837 to 1852.
DK: And what did he do in that area that made him so famous?
SJC: Apparently he ran a sugar plantation in Singapore.
DK: And then he sold the sugar overseas hoping for a little bit of extra income, yes?
SJC: Yes, but I think it didn’t really work out because sugar plantations and sugar exports aren’t actually a big thing in Singapore.
DK: It wasn’t a big thing in Singapore. Tell me. What is your favorite part of Balestier? I mean, if somebody said to you, “I want to go to Balestier and I really have a limited amount of time.” What should I be seeing in Balestier then, Ser Jing?
SJC: I think if it’s for food, I would recommend the stand-alone Loy Kee Chicken Rice restaurant. It’s located along Balestier Road. It serves the chicken rice that I like the most.
DK: OK, and that’s it. I’ve been to Balestier on a number of occasions, and there’s probably one place that I tend to go to more often than anywhere in Balestier, and that’s Whampoa Drive Horticulture. There are lots of things, there. And there’s a store that sells rojak, which is, I think, famous all over Singapore, and many people…
SJC: Yes, it is…
DK: …head to Whampoa Drive just to go and have their rojak. But you’ve got to queue. You’ve got to wait a long time, sometimes.
SJC: You’re absolutely right.
DK: Now I wonder about this Joseph Balestier when he started his 1,000-acre sugarcane plantation. I wonder if he had to borrow money from the banks. What do you think?
SJC: That’s a great question. I have no idea. I would imagine that the banking system in Singapore back then would be…
SJC: …really simple. Yes, limited.
DK: So talking of banks, at Stock Advisor Gold, we have recommended three Singapore banks. We recommended one back in 2016, one in 2017, and one in 2018, and we also re-recommended some of these banks, as well. What is it about Singapore banks, Ser Jing, that makes them so attractive?
SJC: There are three things about banks that you mentioned, David. They’re actually DBS, OCBC, and UOB. There are actually a few key attractive traits that we see in them. The first is that all three of them managed to sail through the Great Financial Crisis of 2008 and 2009 relatively unscathed. We thought that their business performance back then was a positive indication on their attitude to risk-taking. We think that the three banks are not big risk takers and I see it as a really important sign on the longevity of financial institutions.
DK: Just because you’re sure, how have they performed since we recommended DBS, UOB, and OCBC?
SJC: Actually, we have recommended Singapore banks a total of five times. We’ve recommended DBS twice, OCBC once, and UOB twice. Each recommendation has delivered positive returns and all are beating our benchmark. The benchmark that we use in our services would be the S&P Global Broad Market Index which measures the aggregate performance of nearly all major stock markets around the world.
DK: Now you mentioned that Singapore banks came out of the Great Financial Crisis largely unscathed.
SJC: That’s right.
DK: Why do you think they were more resistant to the economic downturn than some of those Western banks and some of those banks in Europe and America?
SJC: I think the chief reason boils down to the attitudes of the banks’ management teams with regard to risk-taking. In my view, they are generally averse to risk-taking. If you actually look back to the financial crisis, many banks in the West were highly leveraged going into the crisis. A great example is found in this book called The End of Alchemy written by Lord Mervyn King, who was an ex-governor of the UK’s central bank (the Bank of England). In his book, he mentioned this bank called Northern Rock which had an asset-to-equity ratio of up to 18 during the financial crisis. Now in comparison, the same ratio by the Singapore Bank did not exceed 14 during the crisis period.
DK: But you know, Ser Jing, there’s a saying in the market, “the greater the risk, the greater the reward.” As Singapore banks have a look at their domestic market, Singapore is not a big country.
DK: We only measure about 250 square miles so, therefore, if those three banks that you mentioned (DBS, UOB, and OCBC) want to expand, they will have to do so outside of Singapore.
DK: What do you think about their idea about expanding outside of Singapore? Will they be as resistant to any downtown in the global economy if they start expanding aggressively overseas?
SJC: Actually, all three banks source the majority of their business from Singapore at the moment, but they actually do have sizeable foreign operations, so they’re actually not strangers to conducting business outside of Singapore. And as I’ve mentioned, all three of them have been very careful when it comes to taking risk. I think this attitude on taking risk is an important part of a bank’s culture. It’s something that stays at a bank for a long period of time. I personally find it hard to see how this careful attitude on risk-taking would disappear just because they would want to expand more aggressively overseas.
DK: We know that a couple of those banks that you mentioned are more or less family-owned. Do you think it is the factor they are family-owned that makes them probably more cautious?
SJC: A great point, actually. I do think that this family-owned dynamic is actually an important part of why they are a little bit more cautious. OCBC and UOB can be categorized as being family-owned, in a way, whereas in DBS’s case, its main shareholder is actually Temasek Holdings, which is one of the Singapore government’s investment arms.
DK: So what are the main drivers for the performance of these three banks?
SJC: I think there are three big drivers for their business performance. First would be the general economic growth in the countries that they operate in. As the countries’ economies grow, there would naturally be more demand for financial services. For example, if companies and/or consumers want to start taking on loans for investment purposes, this is where a bank can step in. I think that’s the first key driver of their performance. In most of the countries that [these three] Singapore banks operate in these countries have seen economic growth.
The second key driver would be the interest rate environment. The Federal Reserve in the US has appeared much more reluctant to raise interest rates as compared to a few months ago, but interest rates, today, are actually higher compared to just a few months ago (and, of course, a few years ago), and if interest rates continue climbing, I think it will be a net positive for the Singapore banks, in general. In fact, the management teams of all three of these Singapore banks have recently said that rising interest rates, up to a certain extent, are net positive for their businesses.
DK: You mentioned the Federal Reserve there and, of course, a lot of people over in America, particularly those who invest in American banks, are very aware of what is going on in the Federal Reserve. But how do Singapore banks differ from American banks? I mean, if somebody was to say, “Yes, you mentioned these three great banks here in Singapore. Why should I invest in these three rather than something in America such as Bank of America or maybe Morgan Stanley (JPMorgan Chase)? Why would I want to invest in a Singapore bank rather than an American bank?”
SJC: I think the key difference is that the Singapore banks are easier to understand, at least from an investing perspective, as compared to the large, integrated US banking groups that you mentioned. It’s actually worth noting that there are many different types of banks in the US, but I think that’s a story for another day. Coming back to our point of discussion, according to the Office of the Comptroller of the Currency in the US, which is known as the OCC, banks in the US have a total notional derivatives exposure of US$ 176 trillion at the end of 2018 and four banks, alone, actually hold 87% of all these derivatives.
The four banks are actually the banks that you mentioned: JPMorgan Chase, Bank of America, Citibank, and Goldman Sachs. I think it’s incredibly difficult to estimate the potential liabilities that can come with derivatives exposure and it’s also really difficult to understand what exactly their derivatives are. So this complexity in the large US banks that comes from their derivatives exposure is the source of the main difference between [US banks] and the Singapore banks.
DK: Now some people looking at Singapore banks might say, “Oh, banks in Singapore must be really old-fashioned.” Would you agree with that, or would you say that the banks, here, in Singapore are embracing the financial technology arena?
SJC: I would say that all of them are hard at work embracing digital technologies in their businesses. As an example, the proportion of digital customers in DBS today, in its consumer and SME businesses in Hong Kong and Singapore, have increased from 33% in 2015 to 48% in 2018, meaning that nearly half of all of DBS’s consumer and SME business customers in Singapore have gone digital in nature, today, and all three of the banks have shown that it’s much cheaper to serve digital customers as compared to traditional banking customers. I think all three of Singapore’s banks are hard at work pushing more and more digital technologies into their businesses.
DK: When I transfer money from one country to another, I can use an app on my phone and I can get that money across very quickly. For me, it is a very efficient and a very cheap way of doing so. Are Singapore banks embracing that kind of thing? Are they facing this kind of challenge head-on?
SJC: I think you’re more broadly referring to fintech, am I right?
DK: Correct, yes.
SJC: Just as a brief description for listeners, fintech is actually short for “financial technology” and it’s a term that refers to organizations that are using technology to deliver financial services in a more customer-friendly and more efficient manner. What’s interesting about these organizations is that they do not necessarily have their roots in the finance industry. I think a great example would be a company like Tencent from China. It has built asset management and SME banking businesses on top of its WeChat app. Another interesting observation I have of fintech is that they also tend to specialize in niche areas as compared with traditional banks which offer integrated services. Put another way, it’s that fintech companies are trying to unbundle financial services.
As I mentioned earlier, the banks in Singapore are [investing heavily] to incorporate more digital technologies into their businesses. They are definitely facing some pressure but, [when it comes to] fintech, they are not sitting still. I gave some examples about DBS earlier. UOB launched ASEAN’s first mobile and digital bank in 2018. The banks in Singapore are working hard in terms of using technology to make banking better and more efficient. More customer-friendly. In fact, I [believe] DBS [thinks] that the best form of banking will be [when] financial services become totally invisible. That’s something that DBS is working hard towards.
DK: If you only had one dollar to invest and you had to choose between the three banks, and you had to make a bet on which one is likely to succeed in the fintech arena and to embrace this new technology, which one of the three would it be, Ser Jing?
SJC: I think of all three, in an ideal world. I would invest in all three.
DK: I said you only had a dollar to invest. You can’t invest $0.30 in each one of the three.
SJC: If I had to make a choice, I think I would go with DBS. Out of the three, it has been the bank that has articulated its digital strategy the clearest, and I think this has been the one that has been the most vocal about all the different experiments and innovations that it’s conducting in the digital space.
DK: Oddly enough, that is the one that is not family-owned. Are you saying that family-owned banks are not as good as the ones that are not owned by family members?
SJC: No, I don’t think so. I think that just happens to be a happy coincidence.
DK: OK. Now, you’re telling me everything great about Singapore banks. What is it that worries you most about Singapore banks?
SJC: What worries me the most is the possibility of Singapore’s economy becoming stagnant. I think it’s not a secret that the demographics of Singapore are not the best. The proportion of our population in the working age will likely shrink in the future if we are not having more babies or bringing more people into our country. That’s a possibility. I’m long-term optimistic about the health of Singapore’s economy, but there’s still a chance that our economy may become stagnant and, if so, then I think that would be a painful experience for the three local banks. As I mentioned earlier, they count on Singapore for the majority of their revenues (at least 50% or more). That’s something I’m keeping an eye on.
DK: For compliance purposes, we have recommended all three banks. What about you personally? Do you own any of the three banks that we’ve mentioned?
SJC: Yes. I do own shares in OCBC.
DK: That’s the only one?
SJC: That’s the only one.
DK: And yet you think that DBS is going to be the one that performs the best?
SJC: Well, your question was in terms of which bank would be the best in terms of being able to drive digitalization. There are more angles to investing in a bank than just the digitalization aspect. Don’t get me wrong. The fact that we have recommended all three of them means that I like all three of them very much from an investing standpoint.
DK: And from a compliance perspective from my side, I couldn’t decide between the three, so I bought all three banks.
SJC: Ah, great for you.
DK: I know, yes. I spread my risk. Thank you so much for joining me today, Ser Jing.
SJC: No problem. Thank you for having me.
DK: I end each podcast — well, I try to end each podcast — with a quote. Today’s quote comes from an author called Anthony Hincks. Anthony Hincks said: “Banks never forgive. They just renegotiate.” I think that is one of the strengths of banks, because they have our money all the time.
SJC: That’s a great quote.
DK: So thank you all for this week. You can subscribe to this podcast for free on Apple Podcasts, Stitcher, Spotify, Google Play, or wherever you get your podcasts. Tune in next week to find out where Investing in Asia will be broadcasting from next time. Thank you.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore CEO David Kuo owns shares in DBS, UOB, and OCBC. The Motley Fool Singapore analyst Chong Ser Jing owns shares in OCBC.
The Motley Fool Singapore has recommended shares of DBS, UOB, and OCBC.