SINGAPORE (Feb 23): Credit Suisse says UOB is its top pick as the bank offers the appeal of positive leverage to rising US rates while providing earnings assurance should there be further asset quality weakness in oil and gas sector loans.
However, Credit Suisse says should there be positive developments to dispel concerns about asset quality, it expects more room for street earnings estimate upgrades for DBS and OCBC.
In 2016, profitability of all three banks weakened y-o-y on the back of a combination of higher provisions, weaker investment income and pressure on net interest margin (NIM).
For DBS and OCBC, 4Q16 net profit was weaker q-o-q and lower than the street estimates while UOB performed in line with street estimates.
Credit Suisse says higher specific provisions q-o-q, driven by rise in non-performing loans (NPL) and markdowns in collateral value, was the primary cause of earnings shortfall vs street expectations for DBS and OCBC.
But as 9M16 results were ahead of expectations, so 2016 full-year earnings were not far off from street estimates despite the weak 4Q16 performance.
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And while all three banks concede that there could still be some stress within the oil and gas support services loan exposure, they all agreed that new NPL formation has peaked in 2016, and should improve in 2017.
“Given the prospects for NIM expansion, potential loan growth at mid-single digit level and possibility of lower provisions y-o-y, we believe that Singapore banks are poised to deliver better profitability in 2017,” says lead analyst Danny Goh in a Wednesday report.
DBS is trading 1 cent higher at $18.76, OCBC is down 6 cents at $9.60 while UOB is down 6 cents at $21.83.
