Singapore's big banks are on a buying spree as share buybacks hit $116.5m

DBS led the shopping spree with 2.95 million stocks bought for $74.79m.

Buybacks in the Singapore Exchange (SGX) crossed the $100m threshold as mid-August 2018 figures skyrocketed to $116.5m which is more than double of the $59.7m buyback record in August 2017. Leading the charge are Singapore's biggest banks with DBS buying 2.95 million stocks for $74.79m, followed by UOB, which bought back 584,000 shares for $15.97m. Meanwhile, OCBC 300,000 of its own shares for $3,57m.

The trend could suggest a reflective of valuation of individual stocks, balance sheet management by listed companies, a component of capital return policy and a part of stock compensation process of senior management, Jefferies analyst Krishna Guha told Singapore Business Review.

Also read: $116.5m mid-August share buybacks beats July's total

The buyback spree happening in Singapore is also common in other markets such as the United States, according to Natixis chief economist for the Asia and Pacific Alicia Garcia-Herrero and INSEAD finance professor Theo Vermaelen. 

“It basically means that companies prefer to reduce their future cost of capital by buying back shares now,” Garcia-Herrero explained. “In other words, companies expect the future situation to be worse in terms of cost of capital so better to reduce such needs.”

However, Vermaelen, whose research topics mainly delve into US buyback trends, said that optimism could also fuel the rise in companies’ buybacks.

This proves to be true in the case of City Developments' (CDL) maiden buyback transaction in August.

“We have repositioned our business for the next lap, with a focus on growth, enhancement and transformation,” CDL Group CEO Sherman Kwek said in their press announcement. “Our robust balance sheet enables us to initiate our share buyback exercise to enhance returns for shareholders.”

Garcia-Herrero believes that the buyback trend is good news for the local bourse, at least in the short run, as current shareholders effectively increase the percentage of ownership.

Also read: Share buyback value jumped 138.76% to $117m in May

“Banks, for example, are regulated to have minimum capital ratios,” Vermaelen explained. “Banks also are concerned about maximising return on equity.”

Aside from banks, SGX also noted of large buybacks from real estate firms. As of mid-August, CapitaLand purchased 3.4 million shares for $11.29m, whilst CDL which just conducted their inaugural buyback transaction by buying 500,000 shares for $4.78m.

In July, developer Wing Tai Holdings also joined the shopping spree with 5.56 million shares brought back for $10.72m.

Another trend which Vermaelen mentioned is executives buying stocks which firms usually do to avoid “dilution” when stock prices are very high.

In July, Oxley deputy CEO and executive director Eric Low See Ching bought 2.5 million shares for $873,000 days after the government’s property cooling measures. His transaction was followed by the firm’s CEO and executive director Ching Chiat Kong who acquired 9.1m shares for $3.19m.

Vermaelen believes that buying back shares is a game that dwells on a 'good feeling about your valuation.'

"Many companies repurchase shares before the stock market crash..." he explained. "And maybe in the long run your company will recover but sometimes the long-run never happens, it doesn't come soon enough." 

The professor said this in relation to the buyback transactions made by supermarkets in the US when Amazon entered the landscape. According to him, they thought that the 'good days' will be back, not knowing that Amazon will actually change the retail landscape. 

In Singapore, the buyback transactions hit its peak on March with deals totalling $222m.