Leverage Your View on Singapore Banks with Structured Warrants

OREANDA-NEWS. Over the past week, Singapore’s listed banks, which together represent just over one-third of the Straits Times Index (STI) weighting, reported results for the three months ended 30 September 2015.

DBS Group Holdings (DBS), Oversea-Chinese Banking Corporation (OCBC) and United Overseas Bank (UOB) averaged net interest income of S$1.46 billion for the third quarter, reflecting an average increase of 8.6% year-over-year and 2.8% quarter-on-quarter. DBS posted the best quarterly performance, with a 13% YoY surge in net interest income to an all-time high of S$1.81 billion.

The three banks averaged a net profit of S$942 million for the quarter. DBS registered a 5.8% YoY increase in net profit, while OCBC and UOB both posted YoY declines of 26.7% and 0.9% respectively.

Excluding a S$50 million charge for first-time adoption of funding valuation adjustment to the fair value of over-the-counter derivatives, DBS’ net profit gained 10% YoY and was stable QoQ. Excluding the S$391 million one-off gain realised in the year-ago period, OCBC’s core net profit rose 7.3% YoY, driven by a 25% increase in earnings from its banking operations, which more than offset a decline in insurance contributions.

DBS’ net interest margin (NIM) jumped to a four-year high of 1.78%, as Singapore-dollar loans were re-priced in line with higher interbank and swap offer rates. OCBC’s NIM slipped two basis points as improved customer loan spreads in Singapore were more than offset by a lower loan-to-deposit ratio and a fall in money market gapping income. Improving loan yields added six basis points to UOB’s NIM in the quarter from the year-ago period, as it also benefited from rising domestic interbank and swap offer rates.

The three banks averaged a non-performing loan (NPL) ratio of 1.0% in the September quarter, compared with 0.9% YoY and QoQ.

DBS’ asset quality remained stable over the period. Stress tests carried out on DBS’ loans to the commodity sector showed no sign of problems, Chief Executive Officer Piyush Gupta told a media briefing on Monday.

UOB registered the highest NPL ratio of 1.3% among the three banks, up from 1.2% YoY and QoQ, due to a few large NPL accounts in Singapore, Indonesia and greater China. OCBC’s NPLs also edged higher to 0.9% from 0.7% in the year-ago quarter and the previous quarter, due to a few large corporate accounts associated with the oil and gas services sector.

The three banks averaged a Return on Equity (ROE) of 11.3% in the third quarter, compared with 12.4% YoY and 11.8% QoQ. UOB registered the highest ROE among the three at 11.8%, while DBS had the lowest ROE of 10.9%.

In the year thus far, DBS, OCBC and UOB have averaged a price decline of 14.8%, with dividends bringing total returns to a negative 11.8%. Over a 12-month and three-year period, total returns were -5.9% and 25.9% respectively. The three banks also have an average indicative dividend yield of 3.8%.

Structured Warrants on DBS 

Structured warrants present an alternative means for investors to leverage their views on the price performance of the aforementioned counters.

DBS warrants traded a total of S$25 million in the month of October, and there are currently 14 warrants on DBS allowing investors to select one based on their risk profile and investment objective. 

Warrant Code	Warrant Name	Type	Maturity	Exercise Price	Conversion Ratio (WPS)
BBOW	DBS MB eCW151201	C	1-Dec-15	21.00	8.00
BBNW	DBS MB ePW151202	P	2-Dec-15	19.55	8.00
U3XW	DBS MB eCW160104	C	4-Jan-16	18.50	10.00
BEFW	DBS MB eCW160111	C	11-Jan-16	19.80	8.00
BEGW	DBS MB ePW160111	P	11-Jan-16	18.00	8.00
BHTW	DBS MB eCW160128	C	28-Jan-16	17.40	8.00
BFLW	DBS MB eCW160201	C	1-Feb-16	18.60	8.00
BFMW	DBS MB ePW160201	P	1-Feb-16	16.80	8.00
BGRW	DBS VT eCW160201	C	1-Feb-16	18.00	10.00
BIFW	DBS MB eCW160215	C	15-Feb-16	16.30	8.00
BGWW	DBS MB ePW160215	P	15-Feb-16	15.50	8.00
BJQW	DBS MB eCW160404	C	4-Apr-16	18.80	8.00
BJPW	DBS MB EPW160404	P	4-Apr-16	16.20	8.00
ANBW	DBS MB eCW160601	C	1-Jun-16	23.00	12.00

For investors interested in the other two banks, SGX currently trades 10 warrants on OCBC, and 15 warrants on UOB.  Investors can refer to the SGX website for a list of available structured warrants on SGX. 

On a side note, the settlement value for single stock warrants at expiry is based on an average closing price for the underlying share over the five days prior to expiry. This is done to reduce the ability for any large expiring warrant positions to effect the closing price of the underlying share at expiry.

§  Single stock call warrants that expire with value are those where the average closing price of the underlying share is above the exercise price. These warrants thus have an intrinsic value. You will then use this settlement price, which is the five-day average closing price prior to expiry date, minus the exercise price, divided by warrants per share.

§  Single stock put warrants that expire with value are those where the average closing price of the underlying share closes below the exercise price. The settlement value is then calculated by subtracting the five day average closing price from the exercise price, divided by warrants per share.

All structured warrants in Singapore are currently cash-settled; investors do not take delivery of the physical shares. Instead, holders of warrants with value at expiry will be sent a cheque of the settlement amount, if any.