With recovery in sight, bank stocks will continue to outperform the broader market as the worst is over, says RHB Group Research. Its analysts are upgrading Singapore banks to “overweight” from “neutral”.

“Positive operating trends in 4QFY2020 and the rollout of Covid-19 vaccination programmes across the region are lifting optimism among Singapore banks. With earnings upgrades post-4QFY2020 results, sector net profit is projected to rebound by 29% y-o-y in FY2021, compared to -28% in FY2020.”

In a note on March 3, RHB is rating DBS a “buy” with target price $30, Oversea-Chinese Banking Corp (OCBC) a “buy” from “neutral” with target price $12.50 and United Overseas Bank “neutral” with target price $26.40. The two banks are the brokerage’s top picks among the Singapore banking sector.

See: DBS reports 26% lower FY20 earnings of $4.72 bil, declares 4Q dividend of 18 cents


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Taking into account the guidance for stronger loan and fee income growth, stable net interest margins (NIMs), as well as lower allowances, RHB’s sector net profit is raised by 12% for FY2021F and 6% for FY2022F.

“We believe bank stocks, which have appreciated by 10% year-to-date, will continue to outperform the broader market, as it remains a proxy to the country’s economic recovery,” says RHB. 

The three Singapore banks reported a 5% q-o-q drop in 4QFY2020 aggregate net profit, notes RHB. That said, results were broadly in line, with the only beat coming from OCBC, which delivered a 10% q-o-q rise in earnings to $1.13 billion. DBS’ 22% q-o-q drop in net profit to $1.01 billion was the weakest, says RHB.

“The q-o-q decline in sector earnings was due to lower trading and investment gains (-12% q-o-q) and a moderate 3% q-o-q rise in operating expenses, which were partly offset by the 9% q-o-q decline in allowances,” says RHB. Meanwhile, net interest income (NII) was stable, helped by better NIMs from OCBC and UOB. 

See also: OCBC sees 9% lower 4Q20 earnings of $1.13 bil, proposes final dividend of 15.9 cents per share


Looking ahead, positive operating trends since 4QFY2020 suggest that the worst is over, says RHB. “Singapore’s economic reopening has lifted consumer sentiment and business confidence. Together with the roll-out of vaccination programmes, banks expect growth to regain momentum from 2H2021.”

According to RHB, loan demand is set to strengthen.” Sector loans, which grew by a moderate 3.4% y-o-y in 2020, are expected to increase by a mid-single digit at the least in 2021. Banks believe growth would be underpinned by the recovery in demand for working capital, and consumption spending.”

See also: UOB posts 33% lower FY20 earnings of $2.92 billion due to lower margins, reduced customer activities; declares final dividend of 39 cents


Also, with short-term rates expected to stay at current levels, banks believe NIMs can be sustained at 4QFY2020 exit levels. “This would allow for the pick-up in loan growth to filter down to higher NII, albeit modestly,” says RHB.

Fee income will see healthy growth on the recovery in business activities, credit card transactions, and sustained demand for wealth management products, says RHB. “This would mitigate the expected drop in gains from trading and investments as bond yields have been edging up since January.”

Loans requiring relief assistance have declined substantially to 1-2% of gross loans in January 2021, compared to 5-10% in September 2020, following the expiry of government-led repayment moratoriums. Consequently, banks dialled down on their credit cost guidance for FY2021.

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With CET-1 ratios at a very comfortable 14-15%, banks indicated readiness to raise their dividend payouts to FY2019 levels, once the Monetary Authority of Singapore (MAS) lifts the cap.

As at 2.20pm, shares in DBS are trading 47 cents higher, or 1.75% up, at $27.41; while shares in OCBC are trading 11 cents higher, or 0.99% up, at $11.19; and shares in UOB are trading 21 cents higher, or 0.84% up, at $25.20.