Yoshikami: Singapore Banks Take Center Stage
It’s a tiny dot on the map, smaller than the state of Rhode Island. Singapore may be small, but over the past four decades it has proven that geographic size does not matter. This country is a giant in Emerging Asia.
I’m making another trip to Asia today, and my first stop is Singapore.
Every time I arrive in Singapore, this city-state’s economic achievements never cease to amaze me. Initiatives set in motion 10 years ago to transform Singapore into a global city and diversify its economy are now paying off. It’s currently one of the world’s fastest growing economies, with a strong, stable currency, reasonable market valuations, and a financial sector that’s one of the most robust in the world.
I will be speaking at an investors forum expected to draw several thousand attendees hosted by OCBC. Nouriel Roubini, Dr. Doom, will be speaking as well and he and I will be together during a question and answer session with attendees. Should be very interesting.
In the aftermath of the financial crisis, savvy investors are looking for bank stability and quality rather than high-growth, margined companies. These desirable qualities can be found in Singapore’s banks.
The top three banks, OCBC, Development Bank of Singapore, and United Overseas Bank are well established and positioned to reap the benefits of regional growth.
And the philosophy of senior management appears to embrace conservative practices. In fact, OCBC was recently named in a banking survey as the safest bank in the world. Additionally, it's innovative and relationship based practices have enabled the bank to increase its market share in this very competitive region. Such is the respect that the financial community has for select Asian regional banks.
The current growth seen in Singapore’s banking industry is a result of strong regional economic fundamentals coupled with rising affluence in Asia. Sustained regional economic expansion will help stroke credit demand and help with margins. Singapore banks are well positioned to reap the growth momentum of the region.
The economic health of Singapore remains strong and is reflected in the statistics. Loan growth and regional expansion continues. The Monetary Authority of Singapore (MAS) reported that loan growth momentum continues to strengthen, with March loan growth increasing to nearly 20% year on year, up from about 17% in February. Loan limits utilization remained at a record level of almost 59%. Net interest margin is also showing signs of stabilizing as a result of banks' focus on corporate loans, particularly to small and medium sized companies. According to MAS, overall business loans grew about 20% year on year, up from 16% in February. Non-performing loan ratios are currently at very low levels and asset quality continues to improve.
Sound healthy and well capitalized? Well for some that is a liability.
There are those who are critical of Singapore’s banking industry, saying it’s too conservative and places too much emphasis on asset quality and capital ratios (which usually results in lower growth and lower returns on equity). Perhaps, but lest we forget about the Great Recession of 2008, let's remember that safety does have its upside. Despite slightly slower growth in the Asia Pacific region, Singapore’s safe and stable banks may become more attractive to investors.
Credit markets which tend to focus on capital, asset quality and liquidity have an appreciation for Singapore’s banks. Still, equity markets sometimes give more of their attention and assets to banks with high earnings growth and high ROEs. More risk theoretically means more reward. But in an environment where financial markets are fragile, perhaps more risk is not what is called for in the current environment.
Its a classic case of deciding whether high growth or stability is the objective. It's our view that being cautious in todays uncertain environment is the more prudent course of action. Solvency matters now more than ever.
Michael Yoshikami, Ph.D., CFP®, is CEO, Founder and Chairman of YCMNET's Investment Committee at YCMNET Advisors. Founded in 1986, YCMNET is a San Francisco Bay Area-based independent money management firm that provides fee-based wealth management services to institutional investors and individual investors. The firm works with clients around the world. Michael was named by Barron's as one of the Top 100 Independent Financial Advisors for 2009 and 2010. He oversees all investment and research activities of the firm and is actively engaged on a daily basis in the firm's securities analysis activities and determines the macro tactical asset allocation weightings for client portfolios. He works with YCMNET's investment team in integrating behavioral investing strategies with the firm's core fundamental perspective. Michael holds a Ph.D. in education, other advanced degrees, and holds the Certified Financial Planner® (CFP) designation.