Analysts are remaining “overweight” on the Singapore banking sector as they see interest rates remaining higher for slightly longer.
Singapore’s interest rates stood flat in March with the three-month Singapore overnight rate average (SORA) remaining at an unchanged 3.64% m-o-m, notes PhillipCapital analyst Glenn Thum.
Nonetheless, March’s three-month (3M) SORA rose by 29 basis points (bps) y-o-y, but stood 2 bps lower than the 3M-SORA average of 3.66% in the 1Q2024, he adds.
UOB Kay Hian analyst Jonathan Koh notes the US Federal Reserve’s (US Fed) “wait-and-see” approach for rate cuts after it paused its rate hike for the fifth consecutive Federal Open Market Committee (FOMC) meeting on March 20.
“While the Fed is on track to cut interest rates within 2024, the timing and magnitude of rate cuts remain uncertain,” says Koh in his April 9 report.
“The Fed could afford to be patient before making the first decisive rate cut given the current resilient economic growth and strong labour market. Data on inflation were also ‘bumpy’ for January and February,” the analyst adds. He anticipates only two rate cuts of 25 bps to happen in 2H2024, compared to the three stipulated by the Fed’s dot plot.
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To this end, the analyst expects domestic interest rates in Singapore to remain elevated for “slightly longer” although this will start receding in 4Q2024, in line with the rate cuts in the US.
At this point, Koh has kept his “buy” calls on DBS Group Holdings and Oversea-Chinese Banking Corporation (OCBC).
He has increased his target price for DBS to $43.25 from $40.75 previously as he likes the bank’s high payout ratio, which is supported by its high return on equity (ROE).
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“Management estimated surplus capital at $3 billion or $1.20 per share based on optimal operating range for common equity tier one (CET-1) capital adequacy ratio (CAR) of 12.5% - 13.5%. DBS will continue to review its capital structure to return surplus capital to shareholders,” Koh writes.
“We expect DBS to raise [its] quarterly dividend per share (DPS) by 6 cents to 60 cents in 4QFY2024, representing an increase of 11%. The elevated payout ratio of 68.8% for FY2025 is supported by its high ROE of 15.1%,” he adds.
DBS’s CEO Piyush Gupta has also expressed his confidence that DBS can achieve an ROE of 15% to 17% over the next three to five years assuming that the Fed Funds Rate (FFR) comes off to a new normal of 3%.
Koh, who has also increased OCBC’s target price to $18.15 from $17.22 previously, likes the bank for its “strategic initiatives” to deliver an incremental revenue of $3 billion cumulatively over FY2023 to FY2025.
“Management aims to deliver ROE of 12% - 13% with additional contribution of 1 percentage point (ppt) from the incremental revenue of $3 billion,” he writes.
“OCBC has the highest CET-1 CAR of 15.9% and lowest non-performing loan (NPL) ratio of 1.0% as of December 2023,” he adds.
Furthermore, the analyst sees potential upside from a higher regular dividend as he anticipates OCBC to raise its final dividend by 2 cents to 44 cents in the 2HFY2024.
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DBS’s net interest margin (NIM) is forecasted to narrow by 7 bps in FY2024 and 12 bps in FY2025.
“We expect net interest income (NII) to increase 0.8% in FY2024 but decline 1.2% in FY2025. We forecast earnings decline of 0.7% in 2025. The mid-cycle adjustments would reduce 2025 ROE by 2.8ppt to 15.1% compared with its recent peak (2023: 17.9%),” writes Koh.
Meanwhile, OCBC’s NIM is also expected to narrow by 4 bps in FY2024 and by 9 bps in FY2025.
“We expect growth in NII to slow from 2.4% in FY2024 to 0.4% in 2025. We forecast flat earnings in 2025. The mid-cycle adjustments would reduce FY2025 ROE by 1.0 ppt to 12.4% compared with its recent peak (2023: 13.3%),” Koh adds.
The analyst has raised his earnings estimates for DBS and OCBC by 6% and 5% respectively.
At the banks’ current share price levels, Koh sees that they provide “attractive value” with a low P/B of 1.13 times and high dividend yield of 6.7% for FY2025.
DBS is his “top pick” due to its excellence in execution and consistency in delivering good results.
“We also like OCBC for its commitment to maintain dividend payout ratio at 50%, focus on trade and investment flows within Asean and defensively low FY2025 P/B of 1.04 times,” he adds.
In his monthly sector update, PhillipCapital’s Thum sees that all three banks’ NIMs will “likely remain flat” in FY2024 despite the higher-for-longer interest environment. That said, a recovery in loan growth and fee income will lift profits.
To him, bank dividend yields are attractive with upside surprises possible due to excess capital ratios and a push towards higher ROEs.
In March, all three banks saw their share prices increase with DBS outperforming the rest with a 7.4% increase. OCBC and United Overseas Bank U11 (UOB) improved by 3.8% and 4% respectively, as well.
“DBS continued as the best performer this month, likely due to its dividend yield being the highest among the three local banks and providing clear guidance for dividend growth in the coming years,” says Thum in his April 5 report.
The analyst has kept his “buy” calls for DBS, OCBC and UOB with target prices of $38.90, $14.96 and $34.90 respectively.
As at 3.09pm, shares in DBS, OCBC and UOB are trading at $35.80, $13.84 and $29.67 respectively.
