The Singapore research team at RHB Group Research remains positive on Singapore banks, despite a “noticeable” pullback in share prices in August.
“Still, sector fundamentals are healthy and we remain positive on Singapore banks over the next 12 months,” the team says in a Sept 14 research note. RHB has kept its "overweight" rating for the sector unchanged.
Following share price gains of some 25% between Jan 1 to Aug 10, Singapore banks saw the gains trimmed to 18% on a year-to-date basis on Sept 13.
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The team attributes this to a number of factors, including an inflow of portfolio funds into Asean countries, rising vaccination rates boosting certainty of economic recovery, a rotation of foreign funds out of China in view of the regulatory uncertainty, and the gradual inclusion of Sea into the MSCI Singapore Index from end-May.
Sea’s phased inclusion is expected to continue impacting bank stocks as portfolio managers rebalance their books. This comes following a hike in the index inclusion factor (IIF) which dictates the weighting of stock constituents in the index in August. With further hikes in the IIF expected in November and Feb 2022, they expect the short-term overhang from the tactical reallocation to last until 1Q2022.
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Nonetheless, the team remains upbeat on the sector. The sanguine outlook is underpinned by loan growth momentum which is expected to be sustained by economic recovery in Singapore and the reopening of regional countries as vaccination rates rise. “This should help lift net interest income even as net interest margins are expected to remain depressed, perhaps, until late 2022,” the team explains.
In addition, the team highlights that core fee income has recovered to pre-Covid-19 levels. They also anticipate banks could potentially write back pre-emptive Covid-19 provisions in 2022. “Our FY2022 sector earnings growth of 9% does not take into account potential writeback of provisions,” they remark.
The resumption of cash dividend payout in August also signals the banks’ confidence in asset quality and capital strength, the team says.
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RHB has “buy” ratings for all three Singapore banks, with United Overseas Bank (UOB) as their top pick, followed by Oversea-Chinese Banking Corporation (OCBC). They note that UOB and OCBC are trading below one time FY2022 P/BV, lower than their historical means of 1.08 times and 1.1 times respectively. RHB has target prices of $30.20 and $14.30 for UOB and OCBC.
Meanwhile, DBS Bank is trading at 1.23 times P/BV, which is almost one standard deviation above the historical mean.
As at 11.55am, shares in UOB, OCBC and DBS are trading at $25.57, $11.60 and $30.14 respectively.
Photo: Bloomberg
