Analysts from UOB Kay Hian and RHB Group Research see a bright outlook for Singapore’s banking sector for the rest of the year after 1QFY2021 ended March results saw the banks beating expectations.

UOB Kay Hian analyst Jonathan Koh notes that DBS Group Holdings and Overseas-Chinese Banking Corporation (OCBC) achieved record earnings of $2 billion and $1.5 billion respectively for the 1Q, while United Overseas Bank (UOB) posted earnings of $1 billion.

The strong performance was underpinned by stabilisation in net interest margin (NIM), growth in wealth management, strong net trading income and moderation in credit costs.

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Koh also highlights developed economies are showing a stronger recovery pursuant to vaccinations and re-openings, while central banks are starting to transition their monetary policy from easing to a more neutral stance. 

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Despite an uneven pace in recovery, Koh notes that DBS and OCBC have upgraded their guidance on loan growth to mid to high single-digit, reflecting a more optimistic outlook for the sector.

To that end, Koh believes the banks are well-positioned to normalise dividend per share (DPS) to pre-Covid-19 levels for FY2021. “DBS, OCBC and UOB’s Common Equity Tier 1 (CET-1) capital adequacy ratio (CAR) of 14.3%, 15.5% and 14.3% respectively are much higher than the targets of 12.5% - 13.5%,”he points out in a May 10 research note.

He maintained his ‘overweight’ rating for the sector, with his top pick being OCBC (rated ‘buy’ with a target price of $15.50) followed by DBS (rated ‘buy’ with a target price of  $35.45).

For RHB’s Singapore research team, the ‘stellar’ 1Q performance prompted an upgrade in the team’s rating for UOB from ‘neutral’ to ‘buy’, resulting in ‘constructive views’ for all three banks.

SEE:Analysts bullish on Singapore banking sector ahead of 1Q21 results

“We expect sector earnings to grow 37% y-o-y in FY2021, with ROE up to 10.3%,” the team says in their May 12 research note. The forecast follows a 5% - 6% raise in sector net profit estimates for FY2021 - FY2022. The team believes that bank stocks will likely consolidate in the near term due to the recent resurgence in Covid-19 cases. Nonetheless, they view that the sector’s upward trajectory remains intact, given that “it is the best proxy to Singapore’s economic recovery and fundamentally the strongest within ASEAN”.

Consequently, the team has also retained its “overweight” rating for the sector, with OCBC and DBS  their top picks. The team has ‘buy ratings for both stocks with target prices of $14.30 and $34 respectively.

As at 1.16 pm, shares in OCBC, DBS and UOB are trading at $11.98, $29.77 and $25.76 respectively.