Analysts from CGS-CIMB Research and RHB Group Research have maintained their “overweight” calls on the Singapore banking sector after the Monetary Authority of Singapore (MAS) announced, on July 28, that it has lifted the restrictions on dividends on Singapore banks and finance companies.
The move comes as the banks have maintained strong capitalisation ratios. It also comes after the US Federal Reserve and European Central Bank ended their dividend restrictions in their respective territories in June and July.
To CGS-CIMB analysts Andrea Choong and Lim Siew Khee, the asset quality across Singapore banks have remained “well-contained” through the Covid-19 pandemic.
That said, any potential deterioration in asset quality may surface in the 2QFY2022 after the target loan reliefs for small- and medium-sized enterprises (SMEs) and needy individuals have expired after end-2021, they note.
“We understand that the regional movement restriction orders recently introduced could result in an uptick in loan relief applications, but significant credit quality concerns are unlikely at this juncture,” write Choong and Lim in a flash note dated July 29.
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On this, the analysts see all three banks – DBS Group Holdings, United Overseas Bank (UOB) and Oversea-Chinese Banking Corporation (OCBC) being on a “firm trajectory” to returning to their pre-Covid-19 net profit levels amid a rebound in business transactions and loan growth.
“At this stage, the banks are on track to meet our FY2021 return on equity (ROE) forecasts of 10% to 12%,” they say.
As such, Choong and Lim expect the banks to reinstate their dividends for the FY2021 to be similar to that of the dividends distributed in the FY2019.
They have also estimated a dividend of 30 cents per share from DBS, 25 cents apiece from OCBC and 55 cents per share from UOB in the 2QFY2021.
“A scenario analysis of banks’ fair values using [the] dividend discount model (DDM) valuation (risk-free rate: 1.2%, terminal growth: 2.5%, beta: 1, market risk premium: 6%) yields $27.72 for DBS, $11.22 for OCBC, and $27.43 for UOB,” estimate Choong and Lim.
Among the banks, Choong and Lim have indicated their preference for UOB as a “laggard and economic reopening play”. The bank has previously stated that it would resume its 50% dividend payout policy previously once the dividend cap has been lifted.
The RHB Singapore research team says it deems the removal of the dividend cap as positive as it “signals confidence and strength in Singapore's banking system, notwithstanding any potential adverse economic development”.
While the team sees an “upside risk” to its FY2021 dividend forecasts for Singapore banks, they will review their dividend forecast on the banks only after their 2QFY2021 results are posted.
OCBC and UOB will release their results on Aug 4 while DBS will release its results on Aug 5.
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To the RHB team, they have identified OCBC as their top pick among the three banks, followed by UOB, then DBS.
The team currently assumes dividend estimates of 93 cents for the FY2021 and $1.20 for the FY2022 for DBS. They have assumed a total dividend estimate of 96 cents for the FY2021 for UOB and an estimate of 43 cents for the FY2021 for OCBC.
As at 12.28pm, shares in DBS, OCBC and UOB are trading at $30.07, $12.07 and $25.92 respectively. According to CGS-CIMB, this comes at 1.40 times, 1.11 times and 1.01 times their P/BV estimates.
Photo: Samuel Isaac Chua / The Edge Singapore
