• The iEdge APAC Financials Dividend Plus Index has gained 19.3% in the 2024 year through to 10 May, bringing the indicative total return of the Index since the end of 2019 to 47.2%. The Index consists of 30 stocks of the APAC Financial Sector listed across six APAC exchanges.
• The Index is now tradeable through the Lion-OCBC Securities APAC Financials Dividend Plus ETF with Code YLD (YLU for the USD Counter). The ETF has debuted at a unit price of S$1.02, with close to S$50 million AUM. The Index also maintains a 5.3% indicative dividend yield, a 10% ROE and 1.0x P/B ratio, with an 85% weighting to APAC Banks. 
• DBS, OCBC and UOB maintain a combined 21% weight in the Index as of the 13 May open, and the trio have recently reported S$8.3 billion in combined Net Interest Income for 1Q24, the sixth consecutive quarter this has come in above S$8.0 billion.

The Lion-OCBC Securities APAC Financials Dividend Plus ETF has debuted on Singapore Exchange with Assets under Management (AUM) of S$47 million. Tracking the iEdge APAC Financials Dividend Plus Index, the ETF is designed to provide access to stable dividend payout attributes and growth in the financial sector, with the APAC region consisting of Australia, Hong Kong, Japan, Singapore, Korea, Indonesia, Malaysia, and Thailand. The five current largest weights of the underlying iEdge APAC Financials Dividend Plus Index are tabled below. 

Source: Refinitiv & Bloomberg (Data as of open of 13 May 2024).

The APAC Financial Sector 

The iEdge APAC Financials Dividend Plus Index has gained 19% in the 2024 year through to 10 May. APAC’s financial system remains a key driver and enabler of regional growth. Apart from effecting growth, the Sector is also affected by the pace of regional growth, in addition, to outlooks for trade, inflation and interest rates. Economic divergences across the region also means that not all of APAC’s Financial stocks are moving in tandem. 

BOJ Governor Ueda noted back in March that ‘interest rates have been raised in many APAC jurisdictions, though inflation rates and interest rates vary across countries and regions, depending on their respective economic conditions’. Such divergences, have priced APAC Financial Stocks at varied levels compared to respective historical valuations, from multiple heavyweights of the Hong Kong Financial Sector trading at significant discounts to their 5-year price-to-book ratios, to multiple heavyweights of the Japan Financial Sector trading at significant premiums to their 5-year price-to-book ratios. At the same time the APAC Financial Sector is also impacted by mega structural economic themes such as digitalisation and the need to address climate change through the financial sector. 

APAC Banks up 85% of the weights of the iEdge APAC Financials Dividend Plus Index, with 10% representation of Insurance companies and 5% representation of Investment Services companies. 

While the margins of the APAC Ex-China Commercial Banking Sector has been buoyed by higher interest rates, resilient economic growth has also contributed to the Sector’s comparative outperformance in early 2024. During these past four months Japan banks took much spotlight. Fitch Ratings maintain that in Japan, higher domestic lending Net Interest Margins should support overall bank profitability, even considering the banks’ plans to raise deposit rates, while higher re-investment yields on JGBs, will also enhance profitability. The Ratings agency qualify that this is provided policy rates are held at a higher level over the medium term. To re-rate the Japan Bank operating environment to ‘a’ from ‘a-‘, Fitch Ratings is looking for stable inflation accompanied by moderate wage increases to underpin consumption and sustainable economic growth, improve the macroeconomic outlook, along with the potential upside for the banks from higher interest rates. 

As maintained by the IMF in April, broad economic risks for the remainder of the year are balanced between upside risks and downside risks. The BOJ Governor has also weighed in on the challenges ahead for APAC banking, noting three key fundamental challenges impacting the Sector. The first is the global shift to a higher interest rate environment in many APAC jurisdictions puts the spotlight on managing interest rate risk and credit risk at financial institutions. The second is harnessing advantages of digitalisation of finance, with industry leapfrogging, and mitigating the cyber and new tech risks. Third is the growing need to address climate change on the financial front through addressing climate-related financial risks and facilitating new investment and finance for the transition.

Optimising the APAC Financials Portfolio

The iEdge APAC Financials Dividend Plus Index represents 30 stocks within the Asia Pacific Financial Sector that maintain a combined market value of US$2.0 trillion. However, as an Index, the market capitalisation is reduced to S$1.2 trillion due to dual-listing capitalisation methodology, in addition to measures that attempt to mitigate concentration risk and boost diversification within the Index. 

At each semi-annual rebalance the Index sees a 20% cap on the majority country weights and 7% caps on individual constituents. This means for instance, at the most recent March semi-annual rebalance, comparatively large constituents such as Commonwealth Bank of Australia (CBA), with a free float market capitalisation close to S$200 billion, firstly saw its weight capped at 7%. The stock weighting was then reduced again to 4%, as the combined weightage of the six Australia listed constituents were capped at 20%. This portfolio optimisation procedure might otherwise have seen CBA represent up to 13% and the Australia-listed banks represent close to 40% of the Index, based on total market capitalisation. 

The Index currently maintains a 5.3% dividend yield. New constituents must meet a minimum 2-year average dividend yield of 3.5%. Existing constituents must meet a minimum 2-year average dividend yield of 3.0%.

The full constituents of the Index and recent performances of the Index are tabled below. 

Note Market Capitalisation tabled above is FULL market capitalisation, rather than the exchange specific market capitalisation which is used for iEdge APAC Financials Dividend Plus Index weightings when stocks are listed across more than one exchange. Index constituents are weighted based on a capped free float market capitalisation weighting scheme, with considerations for foreign-ownership limits, a 7% cap on maximum weight of individual stocks, a 20% cap on maximum weight of each country of listing in the index, and a 5% cap on maximum weight across all Indonesian stocks at the semi-annual rebalance. Source: Refinitiv & Bloomberg (Data as of open of 13 May 2024).

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