UOB Kay Hian analyst Jonathan Koh has maintained his “overweight” recommendation on the Singapore banking sector as the banks’ exposures to Europe and Russia are minimal.
With the sanctions levelled against Russia, Koh writes that systemic risk to the sector is “elevated” but remains below the levels seen during past crises. “[This is because] Russia is not well integrated into the global financial system,” says Koh in his March 10 report.
“Financial linkages with other countries have been reduced since the European Union first imposed sanctions after Russia annexed Crimea and Sevastopol in 2014. Foreign central banks have not tapped on swap lines and repo facilities established by the Fed, indicating most countries didn’t experience dislocation in their financial systems,” he adds.
So far, the sanctions have had a “crippling impact” on Russia’s financial system with the rouble losing 43% of its value year-to-date (y-t-d) against the US dollar. This has led the Bank of Russia to hike its key interest rate from 9.5% to 20% to defend the rouble, notes Koh.
“The picture is vastly different outside of Russia. The FRA-OIS spread, a measure of dollar funding stress, inched higher by 27 basis points (bps) y-t-d to 34 bps. The deterioration is modest compared to previous crises, such as Europe’s Sovereign Debt Crisis (peaked at 59 bps in December 2011) and the Covid-19 pandemic (peaked at 79 bps in March 2020). Financial markets are under stress but remain functional,” he writes.
FRA-OIS, which represents the US forward rate agreement (FRA) and overnight index swap (OIS) market, is used as a metric of potential stress in banking. It takes the difference between the three-month London interbank offered rate (LIBOR) and the overnight index rate.
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Buy into Singapore banks during share price weakness
With the current uncertainties, Koh has estimated a potential downside of 30%-42% in DBS’s share price, a downside of 1%-13% for OCBC, and a downside of 15%-22% for shares in UOB.
These figures were based on the numbers from the past three crises – Europe’s sovereign debt crisis, the crash in oil and gas, as well as the Covid-19 pandemic – as a gauge, says Koh.
“Direction for share prices of banks depends on the progress of peace talks to end the Russia-Ukraine war,” he writes.
“We see opportunities for bargain hunting in current weakness. Technically, we see strong support for DBS at $30 and for OCBC at $11,” he adds.
Koh has kept his “buy” call on DBS with a target price of $35.80.
In FY2022, Koh has pegged a total dividend of $1.44, which represents a dividend payout of 54.8%.
For the FY2023, he has cut his earnings estimates by 6%to $7.06 billion, with an expected total dividend of $1.48, or a payout of 54.7%. During the same year, Koh says he expects the bank’s net interest margin (NIM) to expand by 11 bps to 1.55%, down from his previous estimate of 1.61%.
“DBS provides [a] dividend yield of 4.5% for 2022 and 4.6% for 2023,” he writes.
Koh has also kept his “buy” recommendation on OCBC with a target price of $15.10.
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In the FY2022, Koh expects the bank to distribute a total dividend of 56 cents, representing a payout of 50.6%.
In FY2023, Koh has cut his earnings estimates by 2% to $5.46 billion, with an expected total dividend of 60 cents, or a payout of 49.4%. In FY2023, Koh expects OCBC’s NIM to expand by 9 bps to 1.63% from 1.65% previously.
“OCBC provides [a] dividend yield of 4.9% for 2022 and 5.2% for 2023,” says Koh.
According to the analyst, catalysts to the sector on the whole, include the easing of Covid-19 restrictions and a recovery in the 2HFY2022 after the economy has weathered the Omicron variant wave.
Higher dividends from banks on the back of receding Covid-19 risks will also be catalysts to the sector, he adds.
Meanwhile, risks include the escalation of the Russia-Ukraine war to go beyond the invasion of Ukraine. The geopolitical tensions and trade conflicts between the US, China and Russia is also another downside risk to the sector.
On the impending rate hikes, Koh expects a series of four hikes with the Fed Funds Rate reaching 1.0% by end-2022, unchanged from his previous estimate. “We expect no hikes in 2023 (previous: four hikes),” he writes.
Shares in DBS and OCBC closed at $33.26 and $11.72 respectively, while shares in UOB closed at $30.12 on March 11.
Photo: File photo
