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Analysts keep 'overweight' on Singapore banks amid uneven recovery; top pick being OCBC Bank

Felicia Tan
Felicia Tan6/9/2021 06:37 PM GMT+08  • 4 min read
Analysts keep 'overweight' on Singapore banks amid uneven recovery; top pick being OCBC Bank
Analysts from PhillipCapital and UOB Kay Hian have given OCBC target price estimates of $14.63 and $15.50 respectively.
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Analysts from PhillipCapital and UOB Kay Hian have maintained their “overweight” recommendation on the Singapore banking sector as the sector remained resilient compared to the other sectors that were affected by the Covid-19 pandemic.

Singapore loan growth was relatively flat as it inched up 0.4% y-o-y in April. Business loans contracted for the eighth consecutive month by 1.4% y-o-y. Consumer loans, which grew by 0.3% y-o-y, were up for the ninth straight month, aided by the loan demand recovery for the housing segment.

Local lending rates, however, dipped in May with the three-month SIBOR and three-month SOR falling to 0.44% and 0.23% respectively.

The current three-month SIBOR is two basis points higher than the 1Q2021 average of 0.26%.

The three-month SOR is also two basis points lower than its 1Q2021 average of 0.42%.

Non-performing loans (NPLs) are expected to remain stable as loans under moratorium across all three banks have started to decline.

Moratorium loans for DBS and OCBC declined from 3% and 4% respectively as at end-December 2020 to 1% and 2% in the [email protected]

UOB’s loans under government relief, bank relief and environmental, social and governance (ESG) loan schemes are 90% collateralised.

Banks’ net interest margins (NIMs) stabilised in 1QFY2021 with loans growth rebounding marginally and net interest income (NII) increasing 1% overall.

“For FY2021, we expect loans growth to average 5%. Net fees and commissions grew the most, led by wealth-management and card-related fees,” writes PhillipCapital’s Terence Chua in a June 7 report.

“In view of the improving economic outlook, the banks eased gross profits (GP)s during the quarter. DBS reversed $190 million of provisions made in prior quarters. For the rest of 2021, the banks have guided for an easing of credit costs. With total allowance coverage over 30% above the Monetary Authority of Singapore’s (MAS) regulatory limit, we believe there is further room for GP reversions in 2021,” he adds.

Volatility in the sector was, however, up by 5% y-o-y to $1.58 billion in May, reversing its three-month decline due to the elevated trading as Singapore moved toward the phase two (Heightened Alert) measures.

On the sector overall, Chua says he remains “positive on the upside potential”.

“The banks have traded over 1.4 times price-to-book (P/B) over the last five years and are currently trading close-to or below our target P/B. Our forward P/B targets are supported by improving returns on equity (ROEs) as allowances reverse in FY2021,” Chua writes.

“With total allowance coverage of the banks over 30% above MAS’ regulatory limit, we believe there is further room for GP reversions in 2021. This would boost earnings,” he adds.

To this end, Chua believes that the MAS will ease the dividend cap imposed on Singapore banks as they have kept enough capital buffers.

“Capital ratios of 14.3% - 15.3% are higher than the MAS’ ideal operating range of 12.5 – 13.5%. This is supportive of a resumption of pre-COVID dividend payouts once dividend restrictions are lifted. We believe the banks could pay out special dividends to adjust their high capital buffers,” Chua says.

Amid the three banks, Chua has identified OCBC as his preferred pick. He has kept “buy” on the bank with a target price of $14.63.

“OCBC is expected to benefit more from improving market conditions with its wealth-management and insurance franchises,” he says.

He has kept “accumulate” calls on DBS Group and United Overseas Bank (UOB) Limited with target prices of $31.40 and $28.70 respectively.

UOB Kay Hian analyst Jonathan Koh has also identified OCBC Bank as his preferred pick with a target price of $15.50, followed by DBS with a target price of $35.45. Koh has kept “buy” calls on both banks.

To him, the sector, which accounted for a “manageable” 11% of Singapore’s overall GDP, also rode on the recovery in Singapore and Greater China.

The recovery of both countries accounted for 89.1%, 69.6% and 62.8% of total income for DBS, OCBC and UOB respectively in the 1QFY2021.

In Koh’s view, DBS is “best positioned” to benefit from the rapid recovery from the Covid-19 pandemic in Singapore and China.

DBS is also deemed to be the “least affected” by the resurgence of Covid-19 infections in emerging Asia.

“The interest rate cycle is turning. More G7 countries are exiting emergency monetary support put in place during the onset of the Covid-19 pandemic. Given that interest rates in Singapore are highly correlated to the US, we expect the transition in US monetary policy from accommodative to neutral and subsequently a tightening stance to trigger a re-rating for Singapore banks, pushing valuations toward upcycle levels,” writes Koh.

Koh has kept his existing forecasts for earnings and dividends for both banks.

Shares in DBS, OCBC and UOB closed $29.72, $12.36 and $26.03 on June 9.

Cover photo: Bloomberg

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