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'Buy' Singapore banks as tightening of monetary policy may trigger re-rating: UOB Kay Hian

Felicia Tan
Felicia Tan6/2/2021 06:54 PM GMT+08  • 3 min read
'Buy' Singapore banks as tightening of monetary policy may trigger re-rating: UOB Kay Hian
In the report, UOB Kay Hian has identified OCBC as its top pick followed by DBS.
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Photo: Bloomberg

UOB Kay Hian analyst Jonathan Koh has maintained his “overweight” call on the Singapore banking sector as G7 countries – following the rapid recovery from the Covid-19 pandemic – have started to scale down their accommodative monetary policies.

The Bank of Canada (BOC) has kept its overnight rate of 0.25% but has scaled down its purchase of government bonds by 25% to C$3 billion ($3.29 billion) per week at its April meeting, being the first G7 country to unwind quantitative easing.

This was followed by the UK as the Bank of England (BOE) kept its benchmark interest rate at 0.1% but scaled down its purchase of government bonds by 23% to GBP3.4 billion ($6.37 billion) per week at its May meeting.

In the US, Fed officials intend to discuss plans to downsize its bond purchase programme in upcoming meetings, according to minutes of the Fed’s policy meeting held in late-April.

“FOMC participants expect core personal consumption expenditure (PCE) inflation to overshoot to 2.2% in 2021 and ease to 2% in 2022 in their forecasts made in March,” write Koh in a May 31 report.

Looking at the Global Financial Crisis (GFC), which took place between mid-2007 and 2009, Koh notes that that was followed by a seven-year period of zero interest rates.

However, the runway for zero interest rates at this point is shorter now at just three years, he writes.

“We envisage the US Fed to embark on tapering its bond purchase programme in 2022, paving the way for potential interest rate hikes in 2023,” he says.

“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,” he adds.

To this end, Koh has identified OCBC as his top pick followed by DBS.

Koh has maintained “buy” calls for both OCBC and DBS with target prices of $15.50 and $35.45 respectively.

For DBS, Koh is positive on the bank on its positivity on prospects for future growth in India and China through its acquisitions of Lakshmi Vilas Bank and Shenzhen Rural Commercial Bank.

The bank expects its total provisions to be below $1 billion in FY2021 compared to the $3.1 billion in provisions in FY2020.

With OCBC, the bank has forecast mid-to-high single-digit loan growth for FY2021 compared to the 0.6% y-o-y growth in the FY2020.

OCBC’s management expects credit costs to be at the lower end of guidance of 100 to 130 basis points (bp) over the two-year period, compared to the 67 basis points in the FY2020.

Koh has also kept his existing forecasts for both banks’ earnings and dividends for the time being.

On the higher implied inflation based on the five-year Treasury Inflation-Protected Securities (TIPS), which has increased by 0.65 percentage points year-to-date (y-t-d) to 2.63%, Koh sees the pick-up as “transitory” that’s caused by Covid-19-induced disruption to the supply chain and higher oil prices.

Shares in DBS and OCBC closed at $29.92 and $12.37 on June 2.

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