Analysts are positive on Singapore’s banking sector, with the three local banks serving as “good proxies” to a broader economic recovery. 

DBS, Oversea-Chinese Banking Corporation (OCBC) and United Overseas Bank (UOB) are scheduled to release their 4QFY2020 results on Feb 10 (before Chinese New Year), Feb 24 and 25 respectively.

Maybank Kim Eng analyst Thilan Wickramasinghe upgrades his outlook on banks here to “positive”, after strong market liquidity and stimulus expectations overrode a “negative” call in November 2020. 


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“This momentum is likely to continue, buoyed by continued economic relaxing, targeted support for the vulnerable sectors and higher non-interest income due to market volatility,” writes Wickramasinghe in a Jan 26 note. 

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He adds that while asset quality risks remain elevated, continued relief measures may see it “kicked further down the road”. “A relaxing of dividend caps in line with other OECD regulators could be a further upside catalyst.” 

Maybank KE raises both DBS and OCBC to “buy” from “sell”, with target prices $29.78 and $12.24, and UOB to “hold” from “sell” with target price $25.57.

Wickramasinghe believes China’s forecast beating 4Q2020 economic expansion, strong rebounds in US banking results and a steepening yield curve offers positive readthroughs to Singapore banks.

Stronger GDP growth expectations regionally should support a rebound in loan growth momentum, he adds. “We forecast loans to expand 7% y-o-y in 2021F (4% in 2020F). Low policy rates could support further fee income growth – particularly in wealth & fund management – while volatility may add to trading income upside.”

That said, Wickramasinghe expects non-performing loans (NPL) to expand to 2.1% in 2021F, from 1.7% in 2020F, the highest levels since the global financial crisis. In addition, some 3-4% of system loans are expected to be under moratoriums, raising asset quality risks. 

However, downside protection should bolster these risks. The sector is increasing provisions by 3.4x y-o-y in 2020F, notes Wickramasinghe, adding 54% more in 2021F to reach a provision coverage of 94%. “With expectations of targeted budgetary relief for vulnerable, Covid-19 frontline sectors coupled with higher economic activity in Singapore under Phase 3, we expect more downside protection for asset quality issues going forward.” 

Seeking clarity

CGS-CIMB Research analysts Andrea Choong and Lim Siew Khee are maintaining “overweight” on the sector, highlighting four concerns for banks here moving forward. 

In a Jan 26 note, Choong and Lim recommend “add” on all three banks, with target prices $28.35     for DBS, $12.52 for OCBC and $27.72 for UOB. “We think that UOB could outperform peers on the back of relative net interest margin (NIM) expansion,” they add.

An existing cap on banks’ dividends, introduced last year by the Monetary Authority of Singapore, is CGS-CIMB’s first concern for the year ahead. At 60% of FY2019’s payout, the cap is slated to expire in 1Q2021, and Choong and Lim do not think it will be extended. 

“We think there is enough reason not to extend the cap given improving economic activity levels, large impairment buffers built up in FY2020F, strong capital ratios (CET-1 approximately 14%), and targeted government aid beyond the expiry of loan moratoriums across the region.

Further cuts in credit costs could unlock earnings, say Choong and Lim. “Updates on repayment trends following the expiry of regional loan moratoriums will be crucial in gauging banks’ provisioning trends for FY2021F.”

With improvements in business transaction volumes and contained NPL accretion, impairment expenses may be on the decline, they note. “While we do not envisage Singapore banks making provision write-backs in FY2021F as yet, given their relatively lower risk appetite vs. US banks, we highlight that this could be key in providing earnings upside from FY2022F onwards.”

Also, benchmark rates are now hovering close to zero, marking a potential point of inflection for NIMs across Singapore banks, say the analysts. “While margin compression has slowed as banks reap the benefits of lower funding costs, we think clear guidance in methods to expand NIMs going forward could set one bank apart from its peers. As it stands, banks have been relying on wealth and treasury segments to offset net interest income (NII) reduction.”

“Given no change to Fed rates, our base case factors in approximately 5-15bp of NIM compression across banks in FY2021F (FY2020F: approximately 17-27bp compression),” they add.

Finally, OCBC’s appointment of Helen Wong as group CEO come April could spark renewed interest in the bank’s M&A ambitions, note CGS-CIMB. “With the bank’s capital ratios consistently being higher than peers over past quarters (CET-1 ratio of 14.4% in 3QFY2020), further capital build-up of approximately $7 billion from OCBC Wing Hang’s adoption of the IRB, and its practice of offering a discount for its scrip dividend scheme, we think there is scope to reconsider deploying these funds.”


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Broad earnings recovery

DBS Group Research analyst Lim Rui Wen is remaining positive on banks here, maintaining “buy” on UOB and OCBC with raised target prices of $26.80 and $11.90 respectively. 

“We expect broad earnings recovery into FY2021F for Singapore banks alongside improving credit demand, higher long-end rates, as banks to continue front-loading provisions in 4Q2020 which should support share prices as loan moratoriums begin to taper off,” writes Lim in a Jan 26 note. 

From September to December 2020, OCBC and UOB continued to cut interest rates on their flagship accounts by some 17-27bps during the quarter. This should continue to buffer 4QFY2020 NIM to some extent, says Lim. DBS and OCBC have subsequently announced interest rate cuts with effect from January and February 2021.

Seasonal lull

Meanwhile, UOB Kay Hian Research analyst Jonathan Koh highlights the “seasonal lull” that is the fourth quarter, maintaining “overweight” on the sector. 

In a Jan 25 note, Koh downgrades DBS to “hold” with a target price of $29.45, while preferring OCBC with “buy” at target price $14.65. 

Koh expects DBS to report headwinds from deterioration in asset quality, projecting net profit of $1,002 million for 4QFY2020, down 33.5% y-o-y and 22.7% q-o-q. “We expect net trading income to be lower sequentially due to the usual seasonal weakness (-25% q-o-q) but flat on a y-o-y basis at $225 million.”

On OCBC, Koh sees steady contributions from its core businesses and lower credit costs, forecasting net profit of $882 million for 4QFY2020, down 29.1% y-o-y and 14.3% q-o-q. 

“We expect NIM to be stable q-o-q at 1.54% with active management on cost of deposits. OCBC cut the interest rates for its 360 Account three times in 2020… Wealth management fees have stabilised this quarter after climbing 22% q-o-q in 3QFY2020. Loans and trade-related fees are expected to be seasonally softer,” he writes.

As at 11.50am, shares in DBS are trading 7 cents higher, or 0.27% up, at $25.77; while shares in OCBC are trading 15 cents higher, or 1.44% up, at $10.54; and shares in UOB are trading 23 cents higher, or 0.99% up, at $23.56.