A Comparison of the 3 Local Banks

A month ago, I mentioned that although the banks have become attractive, there is no more room for errors in my portfolio allocation. Hence, I have not picked up any bank stocks yet. In the past 2 weeks, all 3 banks have reported their earnings for 2015. How do they stack up against one another from the risk point of view? In this post, I will analyse the banks' Non-Performing Loan (NPL) ratios.

The NPL ratio is the percentage of the bank's total loans that are already or close to being in default. It eats into the bank's net interest income. As reported, both DBS and OCBC have NPL ratios of 0.9%, while UOB's NPL ratio is 1.4%. The figure below shows the NPL ratio by geography for each bank.

Fig. 1: NPL Ratio by Geography

As shown in Fig. 1, a huge contributor to the banks' NPL ratio is South and Southeast Asia, with NPL ratios between 2.4% and 3.2%. Although China is slowing down, it has not shown up in the NPL ratios for Greater China, which are between 0.4% and 0.9%. Singapore, which makes up the bulk of the banks' loans, has NPL ratios of between 0.4% and 1.0%. The proportion of the banks' loans in the various regions are shown in the figure below.

Fig. 2: Proportion of Bank Loans in Various Regions

As shown above, Singapore makes up the bulk of the loans of all 3 banks, with UOB having the most exposure. In South & Southeast Asia, which has the highest NPL ratio among all regions, DBS has the least exposure, as it does not have major retail presence in Malaysia and Indonesia/ Thailand. In Greater China, both DBS and OCBC have larger presence after their respective takeover of Dao Heng Bank and Wing Hang Bank in Hong Kong.

Putting the 2 figures together, South & Southeast Asia is the region to avoid currently, which DBS has the least exposure. However, the reported NPL ratios are historical figures. Moving forward, if China and/or Singapore were to slow down further, their NPL ratios would rise. In fact, if you look at Fig. 2, every bank has a safe spot. If you think South & Southeast Asia will tank further, DBS is the safest bet. If you believe China will slow down further, UOB is the safest bet. If you think Singapore will slow down further, all 3 banks will be hit, although OCBC has the least exposure among them.

Fig. 3 below shows the NPL ratio by industry for each bank.

Fig. 3: NPL Ratio by Industry

It should be noted that the NPL-by-industry ratios for the 3 banks are not directly comparable. OCBC has an additional sector known as Agriculture, Mining & Quarrying (AMQ), which DBS and UOB do not have. That sector contains the exploration & production part of the Oil & Gas (O&G) industry, which is currently in a deep slump. I believe the O&G industry resides in the Manufacturing sector wholly for DBS & UOB and partially for OCBC. OCBC's NPL ratio for the AMQ sector is a high 4.6%. In the Manufacturing sector, the NPL ratios for DBS, OCBC and UOB are 1.8%, 3.2% and 6.2% respectively. The other sector that has NPL ratios above 1.0% for all 3 banks is Transportation, Storage & Communications (TSC). TSC contains the shipping industry, which is in a prolonged slump. Fig. 4 below shows the distribution of the banks' loans in the various industries.

Fig. 4: Proportion of Bank Loans in Various Industries

As shown in Fig. 4, the bulk of the loans are in housing and Building & Construction, which are both property-related. In the 2 difficult sectors of Manufacturing (including AMQ) and TSC, DBS has the most exposure, followed by OCBC and UOB. Like the analysis by geography, every bank has a weak spot. If you think O&G and shipping will worsen further, DBS is the weakest. If you believe global banks are going to be in trouble, OCBC is the most vulnerable. If you think the local property glut will cause property prices to fall significantly, all 3 banks will be hit, with UOB having the most exposure.

Finally, it is worth asking whether UOB's high NPL ratio is a result of them being more conservative than its 2 rivals. If it is true, it is only a matter of time that DBS' and OCBC's NPL ratio will catch up with UOB's. Fig. 5 below shows the ageing of the NPLs. 

Fig. 5: Ageing of Non-Performing Loans

As shown above, the proportion of NPLs that are overdue beyond 180 days is the highest for UOB, followed by DBS and OCBC. Similarly, the proportion of NPLs that are not overdue yet is lowest for UOB, followed by DBS and OCBC. This suggests that UOB is not being overly conservative compared to the other 2 banks in classifying NPLs.

To conclude, while there are bargains in bank stocks currently, they also face uncertain times, ranging from China slowdown, O&G collapse, shipping slump, property glut, etc. Each bank has its safe and weak spots in these areas. Readers will have to figure out for themselves which bank provides the safest bet and returns.

See related blog posts:

• Prudence is the Name of the Game
• The Type of Debts O&G Companies Have Matters
• The Missing Link Between Oil Price & O&G Profitability

Thoughts on Early Retirement – A Year On

Nowadays, seldom do anyone blog about early retirement any more. About a year ago, after I past my 40th birthday, I went through a thinking exercise about early retirement and thought about what should I do if I were to retire, how should I fund my retirement, what are the challenges in retirement, etc. You can read more about these issues in the following blog posts:

• Retiring at 40
• The Great Retirement Challenge
• Can You Count on REITs for Retirement?
• Concluding Post on Early Retirement

It is about a year later, and no, I have not retired. If you read my earlier posts, you would know that I am not a fan of the "not-working" type of early retirement. However, I am open to the idea of the "keep-yourself-busy" type of early retirement where you might still work for something that you like but not for the sake of making money. 

One year later, what additional insights have I gained about retirement? Currently, we have encountered major volatility in the financial markets in the past 6 months, whereby stock prices have fallen sharply, property prices have peaked, stock dividends are cut, REIT distributions are tapering off, interest rates are rising and regional currencies are falling. On top of that, there are worries about a possible recession and people being laid off. All these make for a difficult time for a retiree. This validates the point that I made in Concluding Post on Early Retirement, where our financial freedom might be conditional on financial markets remaining steady. While we do not need a bull market to be financially free, a bear market could put that financial freedom at risk.

Even so, the current stock market rout has taught me something about retirement planning that I had not foreseen earlier, which is that you need to plan ahead for retirement and de-risk in advance. Prior to the stock market rout in Aug, my portfolio was not under stress and I had around 53% in war chest, which appeared sufficient to provide a comfortable cushion to handle any stock market decline even if I were to retire early. That war chest has since declined to 35% due to a major investment and bargain hunting. It is still facing downward pressure as attractive bargains remain. In other words, cash that is meant to be deployed as war chest into the stock market in times of market declines is not free cash available for retirement. Cash meant for retirement must be separated from cash kept as war chest. That means that prior to actual retirement, the portfolio must be de-risked in advance. It is not possible to retire immediately even though cash appears to be sufficient when times are good.

The second thing I learnt is that when you either run out of war chest or are reluctant to dip further into your war chest, a monthly salary is still the most reliable means of funding your stock purchases. Even though stock dividends and REIT distributions might be sufficient to cover your expenses in retirement and add to your war chest, they do not arrive at the time when they are most needed. Most of the listed companies in Singapore have December as their financial year-end, which means that the majority of dividends are only paid in May. Outside of the dividend-paying months of May, Aug, Nov and Feb, you can only wait if you do not have other streams of regular income.

I still have some more years to go before I actually retire. Still, the thinking exercise in early retirement has been a very fruitful exercise and provides useful lessons in how we should plan and execute our retirement correctly.

See related blog posts:

• Retiring at 40
• Concluding Post on Early Retirement
• Early Retirement Maybe A Luxury That I Cannot Afford

The Evolution of An Investor

2016 marks the 30th year that I have been involved in the stock market. The first 12 years were during my schooling days when I monitored stocks for my father while he was working. The next 18 years were when I invested with my own money after graduation. Looking back at these 30 years, it has been a pretty exciting journey. I experienced the market crashes of 1987 (crash for no good reasons), 1989 (ditto), 1990 (Iraqi invasion of Kuwait), 1997/98 (Asian Financial Crisis), 2000-2003 (dot.com bust, Sep 11 terrorist attack, US accounting scandals and Severe Acute Respiratory Syndrome), 2007/08 (Global Financial Crisis) and potentially another one brewing currently.  In the meantime, I also experienced the super bull run of 1993/94 (Singtel IPO).

Throughout my investing journey, my investment strategies have never stopped evolving. When I first began investing with my own money in 1998, it was a Wild Wild West approach in which I bought stocks that I thought would go up, with no consideration of their earnings history, dividend yields, etc. Needless to say, that approach did not bring me any consistent success in investing. 

In 2001, I took on a different path, thanks to a second-hand book I had picked up fortuitously. The title of the book was "Buffettology", which described the methods Warren Buffett used to analyse stocks. That book set me on the journey of value investing, and the methods described in that book were still used to-date to analyse stocks, even though I am no longer sticking strictly to value investing. That strategy brought me my first consistent investment successes when stocks recovered from the 2000-2003 bear market.

However, sometime after the Global Financial Crisis (GFC) in 2009, I came to realise that while value investing worked, it did not work all the time. Stocks bought before and during the GFC never quite recovered to the levels I had expected. And while there were several multi-baggers achieved through value investing, it also created a number of salted fishes whereby the stock had dropped to almost no value or was delisted. You can refer to How to Get a Multi-Bagger? and The Salted Fishes for a list of multi-baggers and salted fishes up till 2014.

When you realise that a long-held strategy does not work as well as expected and there could be other forces at work influencing your returns, you will be willing to open up your mind to other investment strategies. Beginning in 2011, I ventured into growth stocks at reasonable prices, following the path of Warren Buffett. 

However, there are really not many growth stocks available at reasonable prices. This poses a limit to the growth investing strategy and I started to put some money into turnaround stocks in 2014 and dividend stocks in 2015.

Outside of my cash portfolio, I started contributing to my Supplementary Retirement Scheme (SRS) account in 2006. That created another pool of money for investing. However, I did not want to invest the SRS money the same way as I invested my cash. Instead, I used the SRS account as an experimental lab to test out other ways of investing. That was how I started on Dollar Cost Averaging (DCA) on unit trusts in 2007. The viability of DCA as an investment strategy also lead me to adopt passive investing for my cash portfolio. I started my passive portfolio in 2013 and added a more spicy version of it in 2015. You can refer to The Passive Portfolio and The Anti-Fragile Portfolios for more information.

Despite the diversity in investment strategies, the evolution has not ended yet. A few months ago, I realised that I should begin to learn how to make business investments instead of financial investments. That culminated in a 20% concentration in 1 stock. The recent stock market volatility made this endeavour tougher, but I told myself that if I ever wanted to invest like Warren Buffett, this is something I could not avoid. 

It has been a long 30 years. My investing journey has brought me from the lawless Wild Wild West to the civilisation of value investing to the era of multiple investment strategies co-existing alongside each other. That evolution will continue.

See related blog posts:

• Confessions of a Serious Investor
• Investing Is A Life-Long Learning Journey
• How Long Would You Hold A Value Stock?

For A Better Tomorrow

These are difficult times for investors. Even for me who have gone through several bear markets, I have felt the stress. However, it is times like these that we learn how to be better investors, building up our strengths in emotional control, investment strategies and stock-picking skills. Bear markets are very good at exposing our mistakes, and learning from mistakes is one of the most effective ways of learning the art of investing.

One key area of stress in my portfolio comes from a concentration in Global Logistic Properties (GLP), which was initiated barely 3 months ago in November. It was my first attempt in concentration. As things turn out, it is not the best of times to learn how to concentrate. At the start, a mere 3% daily fluctuation in the stock price is enough to make me worry about the outsized position. In fact, this 3% daily fluctuation can cause more concern than a 30% paper loss in a diversified collection of oil & gas stocks whose collective size in the portfolio is nearly equal to that in GLP. I told myself if I ever wanted to be a successful business investor, I must learn how to ignore this daily fluctuation and the stock price. It is certainly not easy. So far, the paper loss on GLP is approximately 20%. The training will go on.

So, do not be despair by the current difficult times. They are there so that we can learn to become better investors. It is like the young butterfly which is struggling to emerge from the cocoon. The struggle might seem overwhelming at times, but it is through that struggle that the butterfly finds the strength to soar to greater heights!

It is the eve of Chinese New Year and the time to put the stock market aside and celebrate the joyous occasion with your loved ones. I wish all readers a Happy and Prosperous Chinese New Year! 祝大家新年快乐，万事如意!

See related blog posts:

• The Big Picture During Bear Markets
• Possible The Worst Time to Invest – A Year On 
• To Invest Or Not To Invest?