Analysts from CGS-CIMB Research and DBS Group Research are advising investors to accumulate on Singapore bank stocks amid expectations of higher dividends in FY2021 on the gradual relaxation of the dividend caps imposed by the Monetary Authority of Singapore (MAS) in FY2020.

The sector is also seeing “budding shoots of growth”, according to CGS-CIMB analysts Andrea Choong and Lim Siew Khee, who have kept their “overweight” recommendation on the Singapore banking sector.

All three banks saw sustained loan growth momentum in January and February, as system loans for domestic banking units (DBU) and Asian currency units (ACU) expanded 1% y-o-y and 1.2% m-o-m in February. The expansion brings year-to-date growth to 3.7%, in contrast with the 1.1% contraction in FY2020.

The growth, note Choong and Lim, are mainly attributable to regional (ACU) loans, which saw growth in loans for general commerce and financial institutions (FIs).

Regional (ACU) loans expanded 2.0% m-o-m in February, albeit a 1.2% decline y-o-y.

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Domestic (DBU) loan growth rose for the fourth straight month in February at 0.5% m-o-m, albeit a 0.9% decline y-o-y.

The m-o-m growth in the commercial segment was led by loans to the agriculture, mining and quarrying, as well as manufacturing industries.

“We expect the loan growth momentum to head towards around +5% in FY2021, on the back of an uneven economic recovery. A rebound in Singapore GDP growth to +5.3% in FY2021 will be a key driving force of credit growth,” write Choong and Lim in a March 31 report.

The analysts also see the sector registering improvement in asset quality indicators.

February’s DBU consumer loans saw 0.3% growth m-o-m, which was supported by steady mortgage growth.

“Although outstanding credit card receivables (DBU) contracted 1.5% m-o-m in Feb 21 (YTD -2.9%), this was offset by a sustained (and rising) uptake in personal loans (+1.7% m-o-m),” highlight the analysts from CGS-CIMB.

“Notably, credit card charge-off rates had normalised to 6.1% in 4QFY2020 (from a high of 9.1% in 3QFY2020) — a positive signal — but we are keeping watch on unsecured consumer credit growth trends as a leading indicator of possible asset quality deterioration to come, given its links to business sentiment on the ground,” they add.


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“Further, classified exposures as reported by the MAS had improved slightly to 1.6% in 4QFY2020 (from 1.8% in 3Q20) — a broad reflection that asset quality remains contained across other customer segments, as well across Singapore banks.”

The all-time high DBU-Current account savings account (CASA) ratio at 67%, is also another factor for investors looking to put their money in the sector.

“DBU deposits contracted 0.3% m-o-m in February (+8.9% y-o-y) as fixed deposit balances continued rolling off on the back of depressed benchmark rates. The outflow mainly stemmed from residents outside Singapore and were denominated in S$,” write Choong and Lim.

“The sustained maturities of FDs pushed the DBU-CASA ratio to 67% in February — an all-time high since 1991. While system LDR increased to 95.6% in February (from its trough of 91.9% in November 20) given better credit demand, system liquidity remains ample, in our view, given the persistent funding inflows over the past months and relatively muted investment sentiments,” they add.

On this, Choong and Lim have kept “add” for all three banks, with target prices of $28.35, $12.52 and $27.72 for DBS, OCBC and UOB respectively.

“DBS is trading at 1.4 times FY2021 price-to-book value (P/BV). 4QFY2020 earnings were above expectations, mainly on lower tax expenses and credit costs. We expect FY2021 impairments to be lower y-o-y, although non-performing asset (NPA) formation may still trend upwards as government relief expires.”

For OCBC, which is trading at 1.1 times FY2021 P/BV, the bank’s 4QFY2020 results, too, beat expectations at CGS-CIMB, mainly due to lower-than-expected impairments.

“Latest credit cost guidance is unchanged, but non-performing loans (NPLs) may still trend upwards towards 2.5-3.5%. Group loans under moratorium reduced to around 5% (from 10%),” they write.

With UOB, its 4QFY2020 earnings stood in line with Choong and Lim’s expectations as net interest margin (NIM) expansion continued.

“Group loans under moratorium reduced to around 5% (from around10%). Asset quality visibility underpins our expectations of lower credit costs in FY2021,” they write.

According to the CGS-CIMB analysts’ estimates, UOB is trading at 1.0 times FY2021 P/BV.

Potential easing of dividend caps

To DBS analyst Lim Rui Wen, the MAS is likely to ease its stance on the dividend cap that was imposed on all three banks in the FY2020 as they have “preserved sufficient capital”.

As it is, central banks around the world, including the US, Europe and Thailand, have already begun to relax their dividend restrictions.

On this, Lim expects the banks to distribute higher dividends in FY2021 on a gradual relaxation of the caps.

“As the targeted loan moratorium under the Extended Support Scheme – Standardised rolls off after June, we expect MAS to progressively relax its dividend restrictions for banks,” she writes.

“A two-stage relaxation, where Singapore banks would be initially allowed to pay out up to a percentage of their FY2021 net profit prior to the complete removal of restrictions, seems to be a more likely scenario. We believe higher dividends are on the horizon as the managements of banks have signalled their willingness and ability to commit to higher dividends in FY2021, subject to MAS guidelines,” she adds.

As at end-4QFY2020, Lim notes that all three banks’ Common Equity Tier-1 (CET1) ratios of 13.9% to 15.2% were “well above their comfortable operating range of around 13%”, which means that they can revert to the same dividend payout levels as that of FY2019 and still have enough capital buffers within their comfortable range.


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“We believe banks may adjust their high capital buffers via special dividends from FY2022, subject to asset quality and corporate actions at that juncture, as banks navigate through a Covid-19 recovery. Should provisions come within managements’ current expectations, we believe there is a case for some special dividends from FY2022,” she adds.

Amid a recovery in the economy, Lim has kept “buy” on OCBC and UOB as recovery plays with target prices of $11.75 and $25.83 respectively.

This is as “we look towards am earnings recovery led by more stable NIM, higher loan growth, and lower credit costs alongside an uptick in long-end yields,” she writes.

Assuming the banks will be having a 50% dividend payout ratio for FY2021, Lim estimates that OCBC will be distributing dividends of 48 cents per share, while UOB will be distributing $1.09 per share, implying a dividend yield of 4% for OCBC and 4.2% for UOB.

As at 4.43pm, shares in DBS, UOB and OCBC are trading at $28.95, $11.73 and $25.77 respectively.