The Singapore research team at RHB Bank Singapore has upgraded the Singapore banking sector to “overweight” from “neutral”, with United Overseas Bank U11 (UOB) and DBS Group Holdings as the sector’s top picks.
RHB maintains its “buy” calls on UOB and DBS, while remaining “neutral” on OCBC. RHB’s target prices for the three banks are $40.20 (UOB), $44.70 (DBS) and $16.80 (OCBC).
In its report dated Nov 25, the team notes that while market volatility may continue following the US presidential elections and shifting expectations on the US Federal Reserve (US Fed) funds rate path, Singapore bank stocks offer investors “solid defensive options” during this period.
“Earnings downside risk looks low, with the flat earnings expected for the sector next year already taking into account the four US Fed rate cuts and given steps by banks to protect net interest income (NII),” RHB says.
On the other hand, with swap prices pointing to a less aggressive Fed rate cut cycle, there is potential upside to net interest margin (NIM) and earnings.
RHB notes that non-interest income (non-II) has “surprised positively” this year and if investor sentiment remains upbeat in 2025, this may be another potential source of upside surprise.
See also: RHB initiates coverage on CSE Global with ‘buy’ call with TP of 58 cents
Additionally, loan coverage buffers were raised in 3QFY2024, which gives RHB confidence that credit costs can be contained.
The bank sector offers an attractive FY2025 dividend yield of 5.6%, with room for yields to compress amid falling rates.
Furthermore, RHB adds that there could be upside risk to dividend projection for Singapore banks given better-than-expected earnings and more aggressive capital returns.
See also: Suntec REIT biggest beneficiary from MAS’s ‘looser’ leverage, ICR rules: OCBC
DBS offers dividend safety, given its guidance for a fixed increase in absolute dividend per share (DPS). Conversely, if earnings outperform expectations, OCBC and UOB may offer investors better exposure to ride on the upside potential to DPS.
With Basel III reforms having gone live and Singapore banks reporting fully phased-in common equity tier 1 (CET-1) ratios of more than 15%, RHB highlights that capital returns will be a key thesis for Singapore banks in 2025.
RHB notes that the banks’ results for the 3QFY2024 were a “slight beat”, supported by DBS’s strong quarterly performance and helped by strong investment sentiment which boosted wealth fees.
Although 9MFY2024 profit after tax and minority interest (patmi) for DBS, UOB and OCBC stood ahead of forecasts, RHB expects a softer 4QFY2024 as rate cuts kick in, alongside seasonality.
In 3QFY2024, sector patmi grew 14% y-o-y, driven by non-II which increased 33% y-o-y.
“NII was flattish, operating efficiency improved thanks to income growth, while cash on cash (CoC) ticked up as banks built up provision buffers and there were operational merger issues in Thailand (UOB),” RHB adds.
Looking ahead, RHB is of the opinion that the trends DBS and UOB guided for 2025 would not be “too surprising”.
For more stories about where money flows, click here for Capital Section
RHB notes that the NIM squeeze will be cushioned by improved loan growth momentum, healthy fees and normalisation of credit cost run rates. There were no systemic issues on asset quality.
At the sector level, RHB increases its FY2024 to FY2026 patmi by 1%, 1% and 2%, respectively.
RHB estimates FY2024 sector patmi to rise by “a very decent” 7% y-o-y but stay flat in 2025 due to NIM pressure, moderation in non-II growth and impact from the global minimum tax rate.
As at 11.46am, shares in DBS, OCBC and UOB are trading at $42.52, $16.42 and $36.36.