Morningstar Equity Research analyst Michael Makdad has raised his target prices for Singapore’s three banks by 3% to 6% as the shift in the US Federal Reserve’s stance may help maintain margins.
“Comments from regional Federal Reserve Bank presidents and policy board members suggest the Fed may be more likely to hold than to cut US interest rates,” writes Makdad in a Jan 10 note. “One to two rate cuts are now implied by Fed funds futures prices, versus two to three cuts a month ago.”
The Monetary Authority of Singapore's policy targets the exchange rate of the Singapore dollar, leaving the market to determine Singapore dollar interest rates. Fewer cuts in US rates should mean a smaller reduction in local interest rates, says Makdad.
His fair value for DBS Group Holdings rises to $46 from $44 previously, for Oversea-Chinese Banking Corporation (OCBC) to $18 from $17, and for United Overseas Bank (UOB) to $40 from $39.
There is now 5% upside to his new fair values for DBS and OCBC, and 8% upside for UOB. “While UOB is not as geared to the strong growth in wealth management, we think the market underappreciates its potential for expanded shareholder returns in the form of dividends and buybacks,” says Makdad.
In December, Jefferies analysts Sam Wong, Joseph Dickerson and Chen Shujin said they assume $2 billion additional buybacks for each of Singapore’s three banks in FY2025. The analysts believe 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.
The net interest margins (NIMs) of Singapore banks are currently around 2.1% to 2.2%, above the 20-year average of 1.8% to 1.9%. Makdad had forecast that NIMs would decline to around 2% in two or three years, but he now forecasts they will remain closer to 2.1%, “albeit still declining slightly”.
The three banks are also experiencing “faster-than-expected growth” in wealth management fees amid rising equities markets and secular demand from affluent individuals across Asia, notes Makdad. According to him, this benefits DBS most, followed by OCBC.
Still, Makdad notes that some bears think Singapore banks’ share prices already rose 30% to 45% in 2024, potentially leaving room for downside should the environment change. NIMs are also above their long-term average and were as low as around 1.5% in 2021.
See also: Brokers’ Digest: SGX, UOB, Marco Polo Marine, Pan-United Corp, Food Empire, PLife REIT, Wilmar
However, Makdad does not see “any reason to expect a change” in the earnings growth trend right now. “Credit costs are benign and there aren't many struggling borrowers outside a few areas like office property.”
Makdad has assigned a three-star rating to all three banks, against Morningstar’s five-tier scale. This indicates that investors are “likely to receive a fair risk-adjusted return (approximately cost of equity)”, according to Morningstar.
DBS will release its results for FY2024 ended Dec 31, 2024 on Feb 10, and UOB will do so on Feb 19. OCBC has yet to announce the date of its earnings call.
As at 9.52am, shares in DBS are trading 14 cents lower, or 0.32% down, at $43.99; while shares in OCBC are trading 17 cents lower, or 1% down, at $16.93; and shares in UOB are trading 1 cent lower, or 0.03% down, at $36.81.
