I have said for many months that interest rates are likely to stay higher for longer.
Higher for longer interest rates are good for not only savers but also investors in DBS, OCBC and UOB.
In their latest results, DBS said that they expect net interest income to come in slightly higher this year due to this.
This is a change from expectation for net interest income to stay flat or weaken, year on year, as the Fed cuts interest rates.
The Fed is now expected to keep interest rate on hold and might only cut towards the end of 2025.
The number of rate cuts this year expected by Mr. Market has gone from 5 to only 2 now.
This bodes well for DBS, OCBC and UOB.
Coupled with strong growth in their wealth management business and income from fees, we could see earnings surprising to the upside.
DBS has already announced a higher final dividend of 60c per share which is about 10% higher than the 54c per share a year ago.
They are also going to introduce a 15c per share per quarter payout over the next two years.
This is a return of capital to shareholders as the bank has plenty of excess capital.
This brings the payout per quarter to 75c per share.
Mr. Market really likes this and has sent the share price of the bank higher and it is quite possible that it is going to stay higher for longer, just like interest rates.
So, people ask me when am I selling my investment in DBS?
I have said before that 2x book value was something I was looking at.
However, with the recent development, this has to change.
With an additional payout of 15c per quarter per share which increases the dividend by 25%, I would be giving up a lot in terms of passive income by selling now.
As I expect the share price to stay higher for longer, all else being equal, it could be a long wait before I get to buy again at a lower price.
While waiting, the NAV of DBS would continue to climb higher.
Some might say that a gradual return of capital over the next two years means that DBS’ NAV would be impacted.
However, I would highlight that it is only 15c per share per quarter which would be more than covered by retained earnings which means the NAV of DBS would still be growing.
Just some back of the envelope calculation.
60c DPS from a 50% payout.
60c per share retained earnings.
15c per share capital reduction.
The bank is still growing by 45c per share per quarter.
This means that using NAV as a guide to sell, the target price to sell would only move higher over time.
Given the current situation, the share price has more room to move higher.
JP Morgan is now trading at 2.3x book value.
Could we see DBS trading at 2.3x book value too?
I expect UOB and OCBC to surprise to the upside to, barring unforeseen circumstances.
Investing in DBS, OCBC and UOB, increasing the size of said investments and staying invested has been most rewarding.
If AK can talk to himself, so can you.
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