CGS-CIMB’s Andrea Choong and Lim Siew Khee have downgraded their sector call on Singapore banks to “neutral” from “overweight”, as they see limited earnings growth in the coming FY2023 with the pace of rate hikes slowing.
Nonetheless, the analysts believe that with banks dishing dividends at yields of between 4 to 5%, the sector is well supported.
The US Fed has been hiking rates strongly for the latter half of 2022 to combat inflation. The market is seeing a peak policy rate of around 5% in the middle of next year, and the rate is likely to then dip to 4.5% by end of 2023.
“While we still expect sequential margin expansion over 4Q22-2Q23F, we think that banks’ valuations may start easing as the quantum of expansion slows from rising funding costs,” the analysts write in their Dec 6 report.
“On balance, Singapore banks are guiding for absolute NIMs to peak in 1Q-2Q23F, implying a further 30 basis point expansion from 3Q22,” they add.
In addition to higher rates, credit growth is likely to slow, according to Choong and Lim. For example, banking system loan growth slowed to +0.7% yoy in Oct 22 with 10M22 loan growth at just +0.1%.
“Bank management teams have pre-emptively cautioned investors about upcoming slower credit growth; we have factored in 4-5% y-o-y growth in FY23F, versus 5-7% flagged for FY2022,” they add.
Besides the sector downgrade, CGS-CIMB has also downgraded the call on DBS Group Holdings to “hold” from "add" with a lower target price of $36.50 from $38.75, citing its relatively rich valuation of 1.3 times FY2023 book value.
In contrast, United Overseas Bank is trading at book value, and stands to enjoy re-rating following its recent acquisition of Citibank’s consumer portfolio across the region.
As at 11.13am, DBS traded at $34.13, down 1.07%; UOB traded at $30.73, down 0.87%.
