Despite a 10% drop in earnings reported by all three Singapore banks last week, CGS-CIMB Research analysts Andrea Choong and Lim Siew Khee are maintaining “overweight” on the banking sector here, with “add” calls on all three players.
In a May 3 note, Choong and Lim have a target price of $40.20 on DBS Group, up from $39.90; an unchanged $14.20 on Oversea-Chinese Banking Corporation (OCBC); and $35.60 on United Overseas Bank (UOB), slightly up from $35.40.
“Singapore banks recorded a relatively decent showing in 1QFY2022 despite market volatility, partly thanks to an inflection in net interest margins (NIMs) [between 2 and 3 basis points (bp) q-o-q] as Singapore dollar rates started pricing in expedited Fed rate hikes to come, while keeping credit costs contained as macroeconomic headwinds were moderated by an improving economic outlook across Asean,” write Choong and Lim.
Other key income drivers of wealth and treasury income will also be dependent on market conditions in coming quarters, they add, particularly amid the risk-off sentiment today.
The banks differed on their loan growth outlooks, with DBS expecting a slowdown in 2HFY2022 while OCBC and UOB estimate progressive credit demand recovery in FY2022.
DBS had an estimated $1.4 billion in management overlays as at 1QFY2022. The monetisation of digital assets is a potential re-rating catalyst, although scaling up and price discovery may take time, write the CGS-CIMB analysts.
The analysts believe write-backs of management overlays at UOB would be unlikely until Covid-19 truly blows over. “The credit quality of UOB’s moratorium portfolio remains healthy. Its key risk of asset quality concerns from its small- and medium-sized enterprise (SME) and Asean portfolio have been well contained, in our view.”
Meanwhile, OCBC’s robust common equity tier-1 (CET-1) ratio of 15.2% remains a “key tool”, say Choong and Lim, whether for mergers and acquisitions or to cushion against asset quality deterioration.
Dividends secure, OCBC top pick
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The banks are well-positioned to sustain their dividend policies in FY2022, say Choong and Lim.
They expect DBS to pay out $1.44, OCBC to pay 60 cents and UOB to pay $1.20, given that management overlay buffers stayed intact (DBS: $1.5 billion, OCBC: $400 million, UOB: $1.2 billion) as CET-1 ratios held steady at between 13.1-15.2% in 1QFY2022.
With DBS and UOB having entered agreements to acquire Citi’s retail banking franchise in the region, the analysts think OCBC’s capital management plans remain an overhang on the stock given its robust 15% CET-1 position.
OCBC remains Choong and Lim’s top pick for the sector given its “more attractive risk-reward profile”. The bank trades at a 17% discount to its peak valuation of 1.5x P/BV during the previous rate hike cycle, they add.
Look forward to rising interest rates
Rising interest rates remain a key tailwind for the sector, especially with market expectations rising to approximately seven Fed rate hikes in FY2022F, compared to 4-5 earlier this year, write Choong and Lim.
Although a six-month time lag is to be expected for these hikes to be translated into NIMs, the expedited rate hike timeline brings forward a larger portion of the net interest income (NII) rise into FY2022-2023.
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“As we factor in seven Fed hikes into our assumptions, we now expect 31-47bp NIM expansion for banks over FY2022-2024F. While rate hikes bode well for margins, we highlight that the scenario of higher borrowing costs amid stagnant economic growth may soften investment appetite and therefore overall fee income,” write the analysts.
Management overlays offset risks
As a whole, the banks say there were no imminent asset quality pressures on the horizon, whether from China or Russia-Ukraine exposures, and retained their individual credit cost guidance for FY2022.
DBS guided for up to $100 million, while UOB & OCBC guided for between 20-25bp.
“Nonetheless, the banks echoed each other’s sentiments of keeping watch over any change in macro headwinds. Although risks of negative credit cost guidance revisions remain, large management overlay buffers reduce the likelihood of significant earnings downgrades,” write Choong and Lim.
As at 9.14am, shares in DBS are trading 26 cents higher, or 0.77% up, at $34.18; while shares in OCBC are trading 1 cent higher, or 0.08% up, at $12.40; and shares in UOB are trading 33 cents higher, or 1.1% up, at $30.32.
