SINGAPORE (Jan 2): RHB Research is maintaining Singapore’s banking sector at “overweight” as rising Sibor is seen to offset the adverse effects from slow loan growth.
After the 25bps federal funds rate (FFR) hike on Dec 19, the market now expects a milder 1-2 more hikes this year and the three-month Sibor rose to the current 1.89% from 3Q18’s average of 1.63%.
From its sensitivity analysis, RHB says a 1ppt slowdown in loan growth will be offset by a 10bps rise in Sibor.
“Based on our estimates, the impact of the Government’s July 2018 property cooling measures and unexciting trade loans should be offset by increases in Sibor over the next few quarters,” says analyst Leng Seng Choon in a Wednesday report.
Leng says United Overseas Bank (UOB) is a beneficiary of the rising FFR with the bank’s ROE improving to 11.7% in 3Q18 from 10.2% in FY17.
“We expect its NIM to widen to 1.96% by FY20 from 3Q18’s 1.81%,” says Leng, “We assume a relatively mild 6.5% FY19 loan growth for the bank, with overseas loans a key contributor.”
More importantly, UOB is RHB’s preferred pick given the possibility of more dividends ahead as management has indicated its intention to lower its CET1 Capital Adequacy Ratio (CAR) which could translate into higher dividends and drive UOB’s share price higher.
“Our $30.80 target price is equivalent to 2019F P/BV of 1.41x, which is sharply lower than 2007’s 2.1x after four years of FFR hikes,” says Leng.
RHB’s Leng also finds DBS attractive as its earnings will improve the most among local banks from every 1bp rise in Sibor while its wealth management business shows much promise
Although the ongoing US-China trade war could slow DBS’s loan growth more than peers, Leng says the rise in Sibor could offset the negatives.
Based on the previous FFR upcycle between mid-2003 and mid-2007, the FFR rose to more than 5% from 1%. During that time, DBS’s P/BV rose to as high as 1.9x from 1x. The bank is currently trading at only 1.24x 2019F P/BV, and our target P/BV of 1.54x yields a target price of $29.80.
As at 3.11pm, shares in DBS are down 27 cents at $23.42 while shares in UOB are down 30 cents to $24.27.
