Citi Research analyst Tan Yong Hong has upgraded his call on DBS Group Holdings to “neutral” from “sell” after the bank and the sector re-rated “sharply” following DBS’s results for the 3QFY2024 ended Sept 30. “While [DBS’s] 3QFY2024 result was a beat, that was largely trading-income driven,” the analyst notes.
Tan previously downgraded all three Singapore banks, DBS, Oversea-Chinese Banking Corporation (OCBC) and United Overseas Bank U11 (UOB) to “sell” on Aug 5 after an increase in the expectations of US rate cuts. “Our bearish view on the sector is premised on rapid cuts in US dollar (USD) rates alongside softer sentiments impacting fees,” Tan explains in his Nov 7 report.
This time, the analyst sees a trio of tailwinds driving the re-rating in the sector including a rapid shift in rates expectations with rising bond yields for the US two-year and US 10-year treasuries. A spillover in optimism from the strength seen in US banks, as well as DBS’s $3 billion share buyback programme, have also contributed to the positive sentiment.
“While our US economist continues to expect soft macro data leading to steep rate cuts, that could change with inflationary pressure from a second Trump administration and short-term rates have rebounded,” Tan writes.
At the same time, he notes that wealth activities continue to be “robust” with a proportion of DBS’s assets under management (AUM) in assets are at record highs. Clients have also shifted towards higher-yielding products away from treasury products and into structured products.
Following DBS’s 3QFY2024 earnings, Tan has raised his earnings per share (EPS) estimates for FY2024, FY2025 and FY2026 by 6%, 5% and 6% respectively driven by non-interest income as well as lower provisions. While he has retained his net interest income (NII) forecast, the analyst has raised his fee income estimates by 4% to 6%. He has also factored in lower provisions of 17 basis points, down from 25 basis points due to better asset quality and excess $2 billion in general provisions.
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After DBS’s $3 billion buyback plans, the analyst also expects to see higher dividends per share (DPS) of 60 cents as well as a special DPS of 50 cents in the 4QFY2024, which could drive near-term strength. That said, the analyst sees that the buyback programme is likely to be a one-off, given the restrictions to keep any single shareholder stakes under 30%. “Assuming all buyback gets executed, that brings pro-forma common equity tier 1 (CET-1) ratio from 15.2% to 14.4% (80 basis point impact). Based on this, it’s unlikely that further share buyback gets announced, barring a protracted downturn,” he says.
In addition to his call upgrade, Tan also raised his target price estimate to $40.10 from $35 previously, which implies a P/B of 1.7 times. DBS’s valuation is currently at a P/B of 1.8 times, he says.
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Meanwhile, Tan has kept his “sell” call for UOB after the bank’s 3QFY2024 ended Sept 30 results released on Nov 8.
While he notes that UOB’s higher CET-1 ratio was the “key surprise”, the analyst has also kept his target price at an unchanged $29.
After the implementation of post-Basel 3 reforms, UOB’s capital position strengthened with a higher CET-1 ratio of 15.5% as at Sept 30. From September 2023 to June this year, the bank’s CET-1 ratios have hovered around the 13% mark.
“[UOB’s] uplift to CET-1 ratio [has been] fully phased in driven by harmonising of risk-weighted assets (RWA) density across peers, on a fully phased in basis,” says Tan.
UOB’s RWA density, at 55% of its assets as at the 2QFY2024, is compared to its peers, which stood at below 50%.
The bank’s narrowing CET-1 ratio compared to its peers may be due to its management being relatively conservative in their model assumptions in calculating its RWS plus the impact from its regional franchise, Tan adds.
With its CET-1 ratio now coming more in line with its peers, UOB can now utilise 1% of its excess capital, implying excess capital stock of $2.8 billion or around 4.6% of the bank’s market cap, says the analyst. As such, he posits multiple scenarios for capital management including quarterly distributions going forward, special dividends over the next three years, giving out a “chunky” DPS for the 4QFY2024 or announce a “sizeable” share buyback plan.
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UOB’s deputy chairman and CEO, Wee Ee Cheong, also highlighted UOB’s strong capital position in his CEO remarks published on Nov 8.
When asked what the bank intended for capital management initiatives at its results briefing, Wee said that the bank could consider a combination of things including taking full advantage of the Asean growth story. UOB’s chief financial officer (CFO) Lee Wai Fai added that the bank would be looking at all options including finding growth opportunities, conducting share buybacks, or distributing dividends.
In his Nov 8 report, Tan says UOB will finalise its plans during its 4QFY2024 results, which could include immediate capital management initiatives and longer-term plans.
“Prior to today, DBS’s valuation gap over UOB was at multi-year highs [on a ](P/B basis), likely driving a share price squeeze today for UOB,” the analyst writes.
Shares in UOB surged to an all-time high of $36.508 at around 2pm on Nov 8 before closing $2.39 higher or 7.177% up at $35.69 on the same day. Shares in DBS closed 70 cents higher or 1.68% up at $42.40 on Nov 8.
/Update
In a Nov 10 report, Tan upgraded UOB to "buy" and Oversea-Chinese Banking Corporation (OCBC) to "neutral" with new target prices of $40 and $15.80 from $29 and $13.70 previously.
Highlighting UOB's higher-than-expected 3QFY2024 results thanks to its non-interest income, Tan has increased his FY2024 to FY2026 earnings estimates by 1% to 6% driven by reduced net interest margin (NIM) sensitivities, increasing non-interest income from better wealth flows and lower credit cost assumptions of 23 basis points from 25 basis points. On the reduced NIM sensitivities, UOB has guided for $70 million to $80 million per 25 basis points or 1.6 basis points to 1.7 basis points, but Citi uses 1.9 basis points, which is close to the realised NIM sensitivities in FY2022 - FY2023.
"On capital management, we also assume special DPS [of] 25 cents per year across FY2024 - FY2025 as well as [a] $1 billion share buyback program each in FY2025 and FY2026," says Tan. "This translates to total shareholder return (dividend yield plus buyback yield) of 5.6%/7.4%/7.5% across FY2024 - FY2026."
OCBC's 3QFY2024 results also came in above Tan's expectations due to trading income. As such, the analyst raised his FY2024 to FY2026 earnings estimates by 1% to 4% driven by higher trading income and lowered NIM sensitivity after increased positioning in hedges. The analyst sees the higher rates volatility benefiting the bank's customer-related- and non-customer-related flows.
"On capital management, we raise our DPS forecast, expecting [OCBC's] FY2024 final DPS [to] 46 cents [amounting to a] 53% payout ratio)," Tan says. "We see OCBC raising DPS semi-annually through FY2026, implying [a] FY2025 payout ratio [of] 59% [and] FY2026 [ratio] [of] 62%."
