Jefferies analysts Sam Wong, Joseph Dickerson and Chen Shujin assume $2 billion additional buybacks for each of Singapore’s three banks in FY2025. They remain bullish on the sector's long-term prospects given strong commitment to capital return and resilient return on equity (ROE).
In a Dec 3 note, the analysts believe United Overseas Bank U11 (UOB) “should play catch-up” with its $2.5 billion capital surplus, or 4% of its market capitalisation, which will enable it to pursue capital return and growth at the same time.
Meanwhile, DBS Group Holdings “has had a good run”, note the analysts. After its $3 billion buyback, there remains a $5 billion to $7 billion surplus, or 4% to 5% of its market cap. “We do not expect bolt-on mergers and acquisitions (M&As) to materially change the capital return upside.”
Finally, Oversea-Chinese Banking Corporation (OCBC) has a $4 billion surplus against a 14% common equity tier-1 (CET-1) target, or 5% of its market cap.
The bank could update on capital at its FY2024 results sometime in February, say Jefferies analysts, “although the surplus is unlikely to be returned in entirety”.
Wong, Dickerson and Chen have upgraded UOB and OCBC to “buy”, in line with DBS. The analysts have also increased their target prices for all three banks, by 11% to $49 for DBS, by 35% to $42 for UOB and by 31% to $19 for OCBC.
The Jefferies analysts have raised their earnings per share (EPS) estimates for all three banks by up to 5% for FY2024 and up to 6% for FY2025.
Specifically, they raised DBS’s FY2024 and FY2025 EPS by 5% and 4% to $3.94 and $3.95 respectively.
Meanwhile, they raised UOB’s FY2024 and FY2025 EPS by less than 1% and 6% to $3.50 and $3.68 respectively.
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They also raised OCBC’s FY2024 and FY2025 EPS by 2% and 4% to $1.70 and $1.73 respectively.
Singapore versus Hong Kong
According to the analysts, Singapore banks’ investment in franchise improvement has paid off in the past two years. “Before Covid-19, Hong Kong banks were printing 13% ROE [versus] Singapore banks’ 11%. Now, Singapore banks deliver on average 15% ROE [versus] Hong Kong banks’ 11%.”
Jefferies’ Dec 3 report compared Singapore’s three banks to Hong Kong’s Bank of China (Hong Kong), Hang Seng Bank, Bank of East Asia, HSBC and Standard Chartered.
Part of the reason behind Hong Kong banks’ strong profitability before Covid-19 was an “exceptionally low” cost-to-income ratio (CIR) at 29% on average, versus Singapore banks at 44%, say the analysts.
“But on the flip side, Hong Kong banks’ low CIR also reflects underinvestment in the franchise, while Singapore banks were renewing their tech stacks and enriching their product suites esp in wealth management and transaction banking,” they add.
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DBS to tackle Taiwan next
With already record-high profitability at home, the analysts think incremental upside in Singapore banks is coming more from the uplifting of the “ex-Singapore franchise”, says Jefferies.
DBS pioneered that effort — the bank elevated its Hong Kong business acquired in 1999-2001 to become one of the highest ROE banks in Hong Kong. DBS Hong Kong has a pre-tax return on assets (ROA) of 1.9% and it tops the sector average of 1.1%, thanks mainly to its emphasis on wealth business and calculated balance sheet deployment, add the analysts.
DBS will tackle Taiwan next, according to Jefferies. “Ex-Hong Kong, DBS’s Greater China segment only has an ROA of 1.0%, predominantly driven by mainland China. The Taiwan business was barely breakeven in 2023, and marginally profitable in 2024 after Citi integration.”
DBS sees potential in Taiwan as the supply chain diversification in the region linking up Taiwan with Asean countries that are rich in labour supply. Taiwan itself is also an attractive wealth management market that fits DBS’s strategic focus, adds the analysts.
Separately, DBS could consider beefing up its presence in Malaysia, a long-time neighbour that is currently undergoing structural economic reform. Reuters reported DBS could acquire a 29.1% stake in Alliance Bank Malaysia from Temasek, a slice currently valued at US$460 million ($620 million).
DBS last attempted to buy the stake in 2012 but the plan did not go through due to regulatory complexity, say the analysts. “The deal will have negligible immediate earnings implication (0.3% boost before synergy) and should not have any impact on its capital return potential given the size is rather insignificant compared to its surplus capital of $8 billion to $10 billion, before the $3 billion buyback.”
However, it will provide DBS with the option value to benefit from economic cooperation between the two countries in the medium term.
UOB hopes to replicate Malaysia success
UOB acquired the Citi Asean portfolio in 2022. Citi's retail franchise in Asean serves as an “ideal complement” to UOB's strong wholesale banking franchise in the region, say the analysts. “Although the banks' near-term performance was dragged by integration costs, its overseas profitability could improve in subsequent years with the one-off costs rolling off and the economies of scale starting to kick in.”
UOB has already made considerable headway in Malaysia, one of its key overseas markets where the pre-tax ROA is comparable with Singapore. The bank currently is the sixth-largest there and top among foreign banks.
UOB Malaysia serves 1.5 million customers, including 0.5 million migrated from Citi, and aims to grow its retail client base to 2 million by 2026, a quarter of the group's growth target.
Management sees Malaysia’s upcoming economic transformation as a key growth opportunity, supported by ongoing infrastructure upgrade, strong foreign direct investment inflows and the set-up of the Johor-Singapore Special Economic Zone (JS-SEZ).
Overall, UOB Malaysia expects to deliver 11% CAGR in total income supported by 11% loan CAGR and 14% fee CAGR. CIR could improve from 48% to 45%, while ROE could increase from 12% to 14%.
The key next step for UOB is to replicate the success in Malaysia in other Asean markets, most notably Thailand and Indonesia, say the analysts.
UOB had a decent presence in Thailand even before the Citi acquisition. Hiccups upon integration together with domestic macro uncertainties have caused some marginal credit risk formation in Thailand in recent quarters, but the analysts think this should normalise into 2025, supporting a turnaround of the business there.
Indonesia is a relatively new market to UOB; the huge population and a healthy rate environment opens up a vast retail opportunity for the bank, say the analysts. The capital boost after Basel IV implementation gives a decent buffer for UOB to pursue growth and enhance capital return at the same time with a $2.5 billion surplus.
OCBC could look for acquisitions
Lastly on OCBC, Singapore, Malaysia and Indonesia are reasonably profitable with pre-tax ROA ranging from 1.7% to 2.4%. Based on local reporting, OCBC Wing Hang in Hong Kong generates around 1.0% pre-tax ROA and 5% to 7% ROE a year.
From a segment point of view, likely having taken the synergistic business booked outside Hong Kong into consideration, the Greater China segment had a rather healthy pre-tax ROA of around 1.4%-1.5% in the past, say the Jefferies analysts.
Meanwhile, the Greater China ROA improved to 1.9% in 2023 riding on the yield move, but fell back to 1.4% in 1H2024 with some increase in asset quality pressure.
CEO Helen Wong is steering a “One Bank” strategy in hopes of driving more synergy across markets and business units. OCBC Wing Hang, acquired in 2014, has been renamed OCBC Hong Kong to align the brand across the group.
In addition, OCBC could look for bolt-on acquisitions in key markets to strengthen its presence, add the analysts. “The bank already closed the acquisition of PTBC in Indonesia in May and is open to further inorganic growth opportunities.”
As at 4.15pm, shares in DBS are trading 38 cents lower, or 0.86% down, at $43.88; while shares in UOB are trading 16 cents lower, or 0.43% down, at $36.99; and shares in OCBC are trading 6 cents higher, or 0.37% up, at $16.43.
Tables: Jefferies
