What's better than a 0.3% fixed deposit?

How about buying the banks?

A good friend recently wanted some advice on his matured fixed deposit. As it is going to yield 0.3% for the next year, he needs some options.  

As this blog is more informational and entertainment, we will not be able to provide any advice. Let's put ourselves into his shoes and see what we will do if we have his constraints.  

His criteria to me include

1. He do not want to incur any custodian fee (So the shares must be traded on the Singapore Exchange).

2. Some dividend that exceed the fixed deposit rate of 0.3% per annual

3. Ability to withdraw money in 3-5 years time

4. The money should be relatively safe from permanent impairment (downside risk)

5. Some reasonable upside potential in term of capital gain

Same same and one not the same names:

When asked to recommend some shares for further researching, it always easy to rattle off the names of the Singapore banks (DBS, OCBC and UOB).

They have solid balance sheet and a decent ROE. Some of the banks are currently selling below Net Asset Value (NAV) and should at least trade at NAV a few years down the road, the dividends should be lower but hey at least they pay more than 0.3% per annual and I am pretty sure Singapore top 3 banks will be around in a few years time.

We like the three Singapore banks for different reason.

• DBS for its huge deposit base in Singapore through POSB.

• OCBC for owning Bank of Singapore and Great Eastern.

• UOB for being a family run bank (and probably the most prudent of the three) and their organic growth strategies in South-East Asia.

Out of the three, we prefer UOB. The reason is that UOB is the least exposed to Hong Kong and we believe in the growth in South-East Asia. In fact, we hold such a loose view that we are holding all of the three banks now.

If we are going to just break rule 1, then we may be tempted to recommend another bank which is also closely related to Singapore.

While Standard Chartered bank has the exposure to Hong Kong and a subpar return on equity (ROE), they are selling at a huge discount to book. With their banking licenses in many emerging commonwealth countries, their returns are diversified and could be improve. They have a digital bank in Hong Kong, in parts of Africa and soon in Singapore.

CEO Bill Winter is making some good strategic hires and as a customer we are seeing improvement everyday.

Before investing, every investor should understand that Banks are cyclical assets (they ebb and flow according to interest rate, the growth of the economy). While we can hold them forever and expect to receive a dividend, we could not ignore that banks are facing unprecedented headwinds such as a zero interest rate environment. If we take Japanese bank as a reference, they could be zero return assets during such times but at least they will give you a dividend...

Our banking position is small around 5% of our portfolio and they should not make much money or lose much for the next couple of years.

So what we will recommend next? Maybe something that he can buy and hold for quite a long time.

Click here for our next recommendation to this special portfolio.