Singapore’s banks have a resilience that “defies gravity”, with capital adequacy “among the safest in the world”, says UOB Kay Hian Research analyst Jonathan Koh. Ahead of the banks’ results for 1HFY2023 ended June, Koh maintains “overweight” on banks here, with Oversea-Chinese Banking Corporation (OCBC) as his top pick.
In a July 13 note, Koh is remaining positive on DBS and OCBC, with “buy” calls and target prices of $41.50 and $17.50 respectively.
United Overseas Bank (UOB) is set to announce its 1HFY2023 results on July 27, while DBS will do the same on Aug 3 and OCBC on Aug 4.
The three Singapore banks have weathered the Covid-19 pandemic with non-performing loan (NPL) ratio deteriorating on average by just 0.1 percentage point (ppt), notes Koh.
DBS’s and OCBC’s NPL ratios have slipped 0.2 ppt to a similar 1.1% over the past three quarters. “Banks have ample management overlays for general provisions amounting to about $2.1 billion for DBS, $1 billion for OCBC and $1.4 billion for UOB.
OCBC has the highest common equity tier one (CET-1) capital adequacy ratio at 15.9% as of March, followed by DBS at 14.4%, far exceeding the minimum requirement of 9%. “Within Asia, the three Singapore banks are recognised as the top three safest ahead of banks in South Korea, Taiwan and Hong Kong,” says Koh.
Fed impact
Koh forecasts higher interest rates from the US for a longer period. “The Fed kept interest rates unchanged at the Federal Open Market Committee (FOMC) meeting on June 14 but signalled more upcoming rate hikes. The dot plot indicates another two rate hikes of 25 basis points (bps) each to bring the Fed Funds Rate to 5.50% by end-2023.”
Fed chairman Jerome Powell said he does not anticipate core inflation to return to the Fed’s target of 2% until 2025, which suggests that interest rates could stay higher for a longer time frame, notes Koh.
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He expects interest rates to stay elevated till mid-2024. That said, the US economy has stayed resilient despite the series of rate hikes, he adds. “The US economy has weathered higher interest rates, tightening of liquidity and fallout from the collapse of three regional banks. Labour market remains too tight with the unemployment rate still low at 3.6% in June, near the historical low of 3.4% recorded in April.”
New single-family home sales and new construction activities have also surged in May, he adds.
Koh conducted a sensitivity analysis for the impact on 2025 financial performance, including net profit, return on equity (ROE), dividend per share (DPS) and dividend yield, from a fluctuation of Fed Funds Rate and net interest margin (NIM), and a potential slowdown/recession and the resultant hit on credit costs.
Assuming Fed Funds Rate at 5.50%, a deterioration of credit costs from 20 bps to 90 bps would cause DBS and OCBC net profit to drop 25.1% and 24.7% respectively.
Assuming credit costs at 20 bps, a cut in Fed Funds Rate from 5.50% to 4.50% would cause DBS and OCBC net profit to drop 6.1% and 5.1% respectively.
Therefore, Koh trims his FY2025 net profit forecast for DBS by 7% to $9.7 billion due to rate cuts of 100 bps in 2H2024 and credit costs of 31 bps from 22 bps previously.
Meanwhile, Koh trims his FY2025 net profit forecast for OCBC also by 7% to $6.8 billion owing to the same rate cut and credit costs of 32 bps from 23 bps previously.
The local banks provide an “attractive value proposition” with low price-to-book (P/B) of 1.14x, low price-to-earnings (PE) of 8.1x and “sustainably high yield” of 5.9% for 2023, says Koh. “Our top pick is OCBC for its new dividend policy with payout ratio at 50%, focus on Asean and a defensively low P/B of 0.99x. We also like DBS for excellence in execution and consistently delivering good results.”
As at 10.38am, shares in DBS are trading 66 cents higher, or 2.12% up, at $31.67; while shares in OCBC are trading 14 cents higher, or 1.15% up, at $12.29; and shares in UOB are trading 42 cents higher, or 1.54% up, at $27.73.
