Analysts from CGS-CIMB Research, RHB Group Research and UOB Kay Hian have kept their “overweight” recommendations on the Singapore banking sector after the banks posted “decent” results for the 2QFY2021 ended June.
See: DBS sees record earnings of $3.71 bil for 1H21; interim dividend of 33 cents declared, UOB posts 43% higher earnings of $1.0 bil in 2Q21 with interim dividend of 60 cents per share and OCBC’s 2Q21 net profit rises 59% to $1.16 bil, interim DPS of 25 cents declared
All three banks – DBS Group Holdings, Oversea-Chinese Banking Corporation (OCBC) and United Overseas Bank (UOB) – also posted “normalised” dividends on the back of the lifting of the dividend cap imposed previously by the Monetary Authority of Singapore (MAS).
To CGS-CIMB analysts Andrea Choong and Lim Siew Khee, DBS’s earnings surpassed their expectations following a model-led writeback of general positions.
DBS was the only bank to beat expectations, according to estimates pencilled in by the consensus.
According to Choong and Lim, both UOB and OCBC’s earnings for the 2QFY2021 stood in line with their expectations for their FY2021 forecasts.
See also: DBS and Japan Finance Corporation sign MOU to support regionalisation of Japanese SMEs
In an Aug 4 report, Choong and Lim have forecast a total dividend per share of $1.10 and 50 cents for the FY2021 for UOB and OCBC respectively.
In a separate report dated Aug 6, Choong and Lim estimate DBS’s dividends for the FY2021 to be at $1.17 per share, from $1.08 previously.
They have also kept “add” on the bank with a higher target price of $32.70 from $32.64 previously.
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See the rest of the analysts’ reports on DBS here.
In their Aug 6 report, Choong and Lim have cut their credit cost expectations to 10 basis points in the FY2021 from 16 basis points previously to reflect the improved outlook backed by $1.5 billion in management overlays as a buffer.
In addition, the analysts have raised their earnings per share (EPS) estimates for the FY2021 to FY2023 for DBS by 1% to 4% as they factor in “lower impairments, slightly stronger loan growth and lower net interest margins (NIMs) as excess deposits weigh on net interest income (NII)”.
See also: The time to invest in banks is now, says RHB
“While DBS maintains its stance to pay consistently high dividends in line with earnings, its 14.5% Common Equity Tier-1 (CET-1) ratio allows for opportunistic mergers and acquisitions (M&A_, if available. Fed rate hikes are a re-rating catalyst. Downside risks are a new wave of Covid-19-related lockdowns,” write the analysts.
In their Aug 4 report, which compares the earnings highlights between UOB and OCBC, a day before DBS’s results, Choong and Lim have indicated UOB as their “preferred pick” among the three banks.
“UOB’s approach to impairments has been more measured compared to its peers over FY2020. As a result, y-o-y earnings growth in FY2021 will likely be relatively modest, albeit stable, in our view,” they write.
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See also: Analysts positive on UOB following 1H21 results; peg TP estimate of at least $29 and Analysts maintain 'buy' on OCBC following 1H21 results, see higher earnings and dividends ahead
For OCBC, the analysts note that credit costs were “substantially lower”, notwithstanding provision top-ups for residual oil and gas (O&G) exposures.
The Singapore research team at RHB have indicated their top picks as UOB and OCBC with "buy" calls for both and target prices of $30.20 (UOB) and $14.30 (OCBC).
Following a "relatively stable" 2QFY2021, the team has raised its dividend forecast on all three banks.
It has also upped its net profit estimates for the FY2021 to FY2022 by 1% to 2% for the sector.
The banks' return on equity (ROE) is projected to recover to 10.5% from 7.9% in 2020, it writes in an Aug 11 report.
"With the improving outlook expected to extend into 2022 and interest rates likely to rise from late-2022 or early-2023, we believe bank stocks would continue to see positive rerating. Our pecking order: UOB, OCBC and DBS."
UOB Kay Hian analyst Jonathan Koh, in an Aug 6 report, has indicated his preference for DBS followed by OCBC.
According to his forecasts, DBS’s and UOB’s results beat his expectations, while OCBC’s results stood “marginally below” his estimates for the FY2021.
To him, the cyclical recovery remains intact, with economic growth expected to accelerate amid the re-opening of economies.
He has kept “buy” on both DBS and OCBC with target prices of $35.80 and $15.65 respectively.
Sector catalysts include a gradual recovery in the earnings of banks and dividends due to declines in credit costs from FY2021 to FY2022.
A continued recovery in Singapore’s domestic economy, as well as a recovery in manufacturing and exports are also catalysts to the sector.
For more stories about where the money flows, click here for our Capital section
On the flip side, an escalation of geopolitical tension and trade conflict between the US and China are downside risks to all three banks.
Shares in DBS, OCBC and UOB closed at $31.68, $12.46 and $26.96 respectively, or 1.33 times (DBS), 1.06 times (OCBC) and 0.96 times (UOB) P/B, according to CGS-CIMB’s estimates.
Photo: Bloomberg
