Earnings for all three Singapore banks, DBS Group Holdings, Oversea-Chinese Banking Corporation (OCBC) and United Overseas Bank U11 (UOB) are likely to stand at risk in the event that the US Federal Reserve begins cutting rates in September, says DBS Group Research analyst Lim Rui Wen.
Lim writes in her July 26 report: “DBS Group Research now expects the US Fed to cut rates by 50 basis points (bps) in 2HFY2024, followed by 100 bps in 2025.”
The analyst also expects UOB to achieve a better improvement in q-o-q net interest margin (NIM) over peers in 2QFY2024, beating the previous guidance of 1 bps to 2 bps as the bank continues to actively manage its deposit costs.
“In contrast, peers are facing declining Hong Kong Interbank Offered Rate (HIBOR) rates and reduced NIM sensitivity in 2QFY2024. We also expect UOB to see stronger loan growth compared to peers, while sector loans declined by around 1% from end-March 2024 to end-May 2024,” writes Lim.
Meanwhile, the analyst believes that asset quality continues to remain “benign” during the 2QFY2024 with “no major surprises”, noting that credit costs could exceed expectations, providing a buffer for earnings during the quarter.
Lim adds: “Risk factors include overseas commercial real estate exposure. Banks have also started to experience rising credit costs in Thailand.”
See also: OCBC, citing potential recovery, initiates coverage on Nanofilm with tentative 'hold' call
The 2QFY2024 could also see earnings decline q-o-q on higher expenses.
“This is due to largely flat net interest income (NII) for most banks except UOB, alongside a drop in other non-interest income as the high levels from 1QFY2024 normalise, and higher expenses y-o-y (negative JAWs),” says Lim.
Additionally, costs relating to UOB’s acquisition of Citigroup’s consumer business last November should “taper off” during the 2HFY2024, providing a buffer to UOB’s earnings during the period, she adds.
See also: Macquarie revises Singapore earnings growth for FY2024 to 7% from 3%
For Lim, dividend yield continues to be the highlight for Singapore banks, with a possible further increase following the latest Basel IV banking reform.
With this, the analyst maintains “buy” on UOB at an unchanged target price of $34.50. Lim has given OCBC a “hold” call with a target price of $14.90.
“FY2025 dividend yields are currently 5.5% to 6.5% for Singapore banks, which continues to support valuations of 1.1 times to 1.5 times FY2025 price-to-book value ratio (P/BV),” writes Lim.
“DBS has previously committed to increase dividend per share (DPS) by 24 cents per year in the medium term, which was first communicated at its 2023 investor day. We are hopeful of further dividend increases post Basel IV implementation. UOB is expecting a permanent uplift and Singapore banks’ management continue to actively return capital to improve return on equity (ROE),” concludes the analyst.
As at 4.09 pm, shares in DBS, OCBC and UOB are trading at $36.62, $14.80 and $32.21 respectively.
