HSBC Research analysts Weldon Sng and Yash Taparia have kept their “hold” calls on all three Singapore banks, DBS Group Holdings, Oversea-Chinese Banking Corporation (OCBC) and United Overseas Bank U11 (UOB) due to valuations.
As at their report dated Oct 22, DBS has an estimated FY2024 P/B of 1.8 times. OCBC’s estimated FY2024 P/B is 1.2 times while UOB’s estimated FY2024 P/B is also at 1.2 times. These are based on their share prices of $39.70 for DBS; $15.40 for OCBC; and $32.60 for UOB. The analysts have also estimated the banks’ FY2024 yields to be at 5.6%, 5.7% and 5.6% for DBS, OCBC and UOB respectively.
“With strong price performance year-to-date (ytd), we are quite cautious as P/B multiples are at multi year highs and thus are at risk of de-rating as the prospect of eventual lower rates come into view,” they write.
Ahead of the banks’ 3QFY2024 ended Sept 30 results, however, Sng and Taparia have increased their target prices and estimates as they see “strong” non-interest income, such as wealth and customer flow trading to be likely.
DBS’s TP now at $40
The analysts have increased their target price on DBS to $40 from $38 previously and see the bank reporting a profit of $2.8 billion for the 3QFY2024, higher than the $2.79 billion posted in the 2QFY2024. DBS’s return on equity (ROE) is likely to be at 18%. For the FY2024, the analysts expect DBS’s net profit to be at $10.8 billion with an ROE of 17%.
See also: OCBC, citing potential recovery, initiates coverage on Nanofilm with tentative 'hold' call
They see “flattish” loans in constant currency terms for the bank but see downward pressure from foreign exchange (FX) translation with the depreciation of the US dollar (USD) during the quarter.
DBS’s 3QFY2024 net interest margin (NIM) is likely to slip by 0.02 percentage points to 2.12%, down from 2QFY2024’s 2.14%. “Market rates were slightly lower q-o-q but offsetting the impact of these were $7 billion of fixed rate assets that repriced upwards,” the analysts write. To this end, they see that the bank’s commercial NIM was likely to be stable, but its markets trading book NIM was “likely a drag”.
During the quarter, the HSBC analysts predict DBS’s wealth and treasury customer sales to remain strong. DBS’s cost-to-income (CIR) ratio is expected to come in at around 40% with operating expenses (opex) on track. DBS’s credit costs are also likely to be “benign” but the bank may see this normalising upwards on a q-o-q basis. DBS’s common equity tier 1 (CET-1) ratio is likely to see a transitional 2 percentage point increase but the impact to its fully-loaded CET-1 ratio is “likely neutral”.
See also: Macquarie revises Singapore earnings growth for FY2024 to 7% from 3%
OCBC’s TP now at $16.50
The analysts’ target price for OCBC is now at $16.50, up from $15.80, with an estimated 3QFY2024 profit of $1.87 billion, down from $1.94 billion in the 2QFY2024. OCBC’s ROE is likely to be at 14%. For the FY2024, the analysts expect OCBC’s profit to be at $7.5 billion with an ROE of 14%.
According to the analysts, OCBC’s loans are likely to be on track for the bank’s aim to see low single-digit growth this year. The growth is likely to come from Malaysia, Indonesia and some drawdown from Singapore mortgages. Like DBS, the analysts see the possibility of a “slightly negative” translation from FX.
OCBC’s 3QFY2024 NIM is likely to be at 2.17%, 3 basis points lower q-o-q with its full-year NIM likely to be at the lower end of the bank’s 2.20% to 2.25% target thanks to more NIM pressure likely to take place in the 4QFY2024.
Meanwhile, the bank’s non-interest income is likely to remain positive from wealth and trading. However, insurance is likely to have moderated on a q-o-q from a high base but still positive on a y-o-y basis. Trading income is also likely to be strong even in non-customer flows.
To the analysts, OCBC’s opex is likely to have picked up on a q-o-q basis due to business volume-related costs such as sales commissions. As such, the bank’s CIR is expected to be at 39% in 3QFY2024, up from 2QFY2024’s 38%. OCBC may see its normalised CIR in the 40% to 45% range, they add.
The analysts also see “benign” credit costs which may increase q-o-q for the bank while its CET-1 ratio, like DBS, is likely boosted by 2 percentage points on a transitional basis with impact to its full-loaded figure to be neutral.
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UOB’s TP now at $35.50
Finally, the analysts have raised UOB’s target price to $35.50 from $33 with an estimated 3QFY2024 profit of $1.53 billion from $1.42 billion in the 2QFY2024. UOB’s 3QFY2024 ROE is expected to be at 14% with full-year ROE of 13%. The bank’s FY2024 profit is expected to come in at $5.9 billion.
Based on the analysts’ estimates, UOB is likely to see “modest momentum” in loan growth, especially in Malaysia and Thailand. The bank should also see positive FX translation.
“In wholesale, there was likely growth in both trade and term loans. In retail, there was likely more drawdown due to a pickup in housing transactions from April. Malaysia mortgages also likely saw some upside. For deposits, there was likely no major outflow even after cutting One Account rates,” the analysts write.
In 3QFY2024, UOB’s NIM is likely to be flat at 2.05% with lower cost of funds offset by duration-building, which lowered the expansion of its loan and interbank & securities margins.
Non-interest income is also likely to see a pickup from wealth fees and credit cards. Credit cards saw some pick-up with the impact of UOB’s Thailand operations offset by momentum in other markets.
UOB’s core CIR is likely to be within its aim of 41% to 42%. “With a stronger top line, UOB likely took the opportunity to book more technology costs, making opex increase q-o-q,” say the analysts.
Credit costs for the 9MFY2024 are also likely to be on track for UOB’s target of 25 basis points to 30 basis points.
“Thailand operational day-one impact might have continued to affect asset quality, with the weakness already seen from 2QFY2024. However, delinquencies probably peaked around August as operational issues likely started to resolve, and so we think 4QFY2024 might see lower credit costs,” say the analysts.
“New non-performing assets (NPA) formation likely tracked the $300 million - $400 million normal quarterly range, including Thailand,” they add.
UOB’s CET-1 ratio was also likely to be boosted by 2 percentage points on a transitional basis with the impact to its fully-loaded ratio at 50 basis points.
As at 2.08pm, shares in DBS, OCBC and UOB are trading $39.35, $15.41 and $32.64 respectively.
