Maybank Securities analyst Thilan Wickramasinghe has upgraded his sector outlook on Singapore banks to “positive”, citing that banks’ loans and profitability stand to benefit from Chinese stimulus.
“Past Chinese stimulus in 2009 and 2015 have had positive impacts on Singapore banks’ loans and profitability,” Wickramasinghe writes in his Oct 14 report. “We believe the current measures may do the same.”
On Sept 26, the Chinese government gave its strongest indication yet that it was ready to use fiscal spending to boost the country’s gross domestic product (GDP) growth, said Maybank analysts Erica Tay and Chua Hak Bin in a Sept 29 report on China economics.
On Oct 12, China’s finance ministry also hinted that there was going to be a large fiscal injection that was currently undergoing approvals. The country was also looking to unlock existing fiscal resources, which brought about confidence of ushering growth, Wickramasinghe notes.
He adds that with past stimulus measures in November 2009 and November 2015, there was a subsequent growth in loan momentum in the North Asian operations of the Singapore banks.
“In 2009, loan growth of -3% y-o-y in North Asia, accelerated to 34% in 2010 and 60% in 2011. In 2015, credit growth went from -1% y-o-y to 13% by 2017,” says Wickramasinghe. “With North Asia accounting for 29% of DBS, 23% [of] Oversea-Chinese Banking Corporation (OCBC) and 16% of United Overseas Bank U11 ’s (UOB) loan books, potentially higher economic activity in Hong Kong and Greater China has us raising FY2025 to FY2026 loan growth assumptions by 2 percentage points (ppts) to 3 ppts.”
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Profit before tax (PBT) within greater China also saw a strong turnaround with past stimuli, the analyst adds.
At the same time, the banking sector is poised to benefit from several positive developments including rising regional credit demand, the Johor-Singapore Special Economic Zone (JSSEZ) and an assets under management (AUM) base converting from fixed deposits to wealth management products commanding higher fees, Wickramasinghe notes.
The JSSEZ is likely to drive cross-border credit and transaction demand, which could drive further revenue momentum for Singapore banks in FY2025 to FY2026, the analyst adds.
See also: Macquarie revises Singapore earnings growth for FY2024 to 7% from 3%
Furthermore, the banks could see added revenue contributions from a new capital expenditure (capex) and investment cycle from falling US Federal Reserve (US Fed) rates as well as supply chain relocations and fiscal stimulus in Thailand and Indonesia, he continues.
‘Bright spots’ in non-interest income in 3Q
The 3QFY2024 should see “bright spots” in non-interest income and “benign” non-performing loans (NPLs).
While sector net interest margins (NIMs) should retreat further in the quarter after falling by 2 basis points (bps) on a h-o-h basis in 1HFY2024, non-interest income, especially wealth management, should see sequential growth. This is due to a conducive market environment and drops in fixed deposit (FD) deposit yields in the third quarter.
In Wickramasinghe’s view, the potentially lower NIMs in the 3QFY2024 could come from topped out corporate loan yields and excess liquidity parked in low yield, high quality assets. However, he adds that the latter strategy should also slow the pace of NIM decline by locking in yield.
“We expect cautious loan growth guidance to remain unchanged for the rest of FY2024 given relatively high interest rates,” he says.
To this end, the analyst sees “limited sectoral distress” and that NPLs and provisions could “surprise on the upside”.
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OCBC and UOB upgraded to ‘buy’; DBS kept at ‘buy’
Overall, the analyst lowers the sector’s cost of equity (COE) by 40 bps to 50 bps on account of falling interest rates and rising regional inflows.
“We also raise FY2025 to FY2026 average sector earnings by 2% each.”
As such, Wickramasinghe has kept his “buy” call for DBS, while upgrading OCBC and UOB to “buy” from “hold” previously.
He has raised his target price estimates for all three banks. DBS's target price is now at $44.06 from $38.76 while OCBC's target price is now at $17.01 from $15.32. UOB's target price is now at $35.62 from $32.90.
“While earnings may experience negative momentum, capital-high capital returns should support more capital returns, keeping dividend yields attractive amidst falling rates,” writes the analyst.
He continues: “Upcoming 3QFY2024 results should show slower than previously expected NIM contraction and a pickup in fees with a backdrop of solid asset quality.”
Shares in DBS, OCBC and UOB closed at $39.13, $15.20 and $32.18 respectively on Oct 14.
