Why I'm Sticking with DBS, UOB & OCBC

Better than REITs?

It's been a solid year for our three local banks - DBS, UOB & OCBC.

The era of higher interest rates is actually a boon for banks, driving up their profitability and bottom lines.

The result?

Record high earnings and dividends for shareholders like you and me.

A Decade of Investing in Singapore Banks

I've been investing in these banks for almost a decade.

In this decade - I’ve never had a view on where interest rates are going - because simply no one knows.

My approach has been simple – invest in solid, well-managed banks with conservative management.

It also helps that Singapore has a strong regulatory environment, keeping banks in check and preventing them from running amok.

Another bonus?

Our government's fiscal responsibility.

This allows them to intervene in extreme situations, like the once-in-a-lifetime crisis we witnessed from 2020 to 2022 when COVID struck.

This intervention helped businesses and citizens weather the storm, indirectly benefiting shareholders of banks too.

Reasonable Valuations, Steady Growth

Today, bank valuations are in a reasonable range – neither extremely expensive nor extremely cheap.

My thesis on them hasn't changed much, and I continue to be a patient shareholder, watching them grow their business steadily and surely.

Sure, interest rates may moderate down at some point.

However the credit cycle will eventually pick up, with credit growth driving future earnings.

Today banks trade at a generous yield of about 6% - which in my book is pretty attractive.

Banks vs REITs: A Yield Showdown

At the moment, I prefer banks to REITs.

While yields may be similar for both, there's a big difference in their underlying earnings.

S-REITs are required to distribute 90% of their income earned as dividends to unit-holders, whereas Singapore banks are only distributing about 50%.

This provides a bigger margin of safety for bank investors.

It's crucial for investors to look beyond the final dividend or distribution yield and examine the underlying earnings driving that yield.

REITs: A Different Picture

With REITs, the picture is slightly different. The higher interest rate environment has led to a severe deterioration of financial positions, even for "blue-chip REITs".

Weaker REITs have suffered even more severe deterioration in share prices.

Many people are focusing on leverage ratios, but it's also important to look at interest coverage ratios, which have weakened significantly.

There are different scenarios to consider, and one where interest rates actually go up could have an adverse impact on REITs.

I shared more about REITs in my earlier article - The “Original Sin of REITs'“ here.

My Preference: Singapore Banks

So, at the moment, if I had to choose between Singapore banks and REITs, I'd go with the banks.

Their strong fundamentals, reasonable valuations, and ability to weather storms make them an attractive investment option in my book.

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