DBS Group Research’s Lim Rui Wen is of the opinion that Singapore bank stocks are likely to see a rerating, given the expected rate hike cycle from the US Federal Reserve.
She has maintained a buy call on both UOB and OCBC, with target prices of $31 and $14 respectively.
In a Dec 1 note, Lim says that DBS economists now expect rate hikes to be delivered earlier, with two rate hikes in 2H2022 if economic momentum is maintained, and an additional two rate hikes in early 2023, with potential upside risks.
This means that net interest margins (NIM) and consequently earnings could see an upside in 2H2022, as the banks start to reprice loans on higher benchmark rates.
DBS management has guided for $1.8 to $2 billion of incremental net interest income for every 100 basis points of the rate hike.
Furthermore, she thinks that the banks’ provision writeback could provide earnings upside in FY2022.
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“While 3QFY2021 saw some headwinds in terms of higher regional non-performing loans (NPLs) and specific provisions largely arising from Malaysia’s new moratorium round, we believe risks are largely mitigated by the ample provisions buffer across the banks,” she writes.
Lim observes that DBS and UOB have over $1 billion in overlays in general provisions, some of which may be written back, subject to the Covid-19 situation and other factors.
Every 10 basis points decline in credit costs provides 5-6% earnings upside in FY2022, she adds.
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As such, Lim expects further upside in dividends in FY2022, due to Singapore banks’ strong capital levels.
She says they are “above management’s comfortable operating range,” although she does acknowledge that banks may also wish to keep some of the excess capital to deploy for growth and/or further corporate actions.
OCBC is estimated to have $4.6 billion to $5.7billion of excess capital, while UOB is estimated to have up to $1.3 billion of excess capital.
This translates into about $1 per share and up to approximately 70 cents per share for OCBC and UOB respectively.
Lim concludes, “We continue to favour Singapore banks across ASEAN banks due to their high earnings visibility, dividend yields, and certainty of firm earnings and ROE recovery beyond FY2021. Singapore banks are Fed hike beneficiaries and we can also look forward to potential writeback of provisions and potential return of excess capital in FY2022."
She does warn, however, that some risks are a slower-than-expected economic recovery, resurgence of pandemic cases and lockdowns, higher-than-expected credit costs, and/or Fed hikes later than expected.
As at 2.52pm, shares of UOB and OCBC traded at $26.11 and $11.24 respectively.
