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RHB stays 'overweight' on Singapore banks with UOB as top pick

Atiqah Mokhtar
Atiqah Mokhtar • 3 min read
RHB stays 'overweight' on Singapore banks with UOB as top pick
UOB is RHB's top pick for the Singapore banking sector, while DBS has replaced OCBC for the second spot.
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RHB Group Research has maintained “overweight” on the Singapore banking sector following a “resilient” 3Q2021 despite the re-imposition of pandemic control measures across the region.

“Aggregate net profit from Singapore banks rose 3% q-o-q in 3Q2021, helped mainly by the 46% q-o-q decline in provisions,” the RHB Singapore research team points out in a Nov 10 research note.

Sector earnings for the first nine months of 2021 were at 79% of the RHB team’s FY2021 forecast, with DBS delivering the “strongest outperformance for yet another quarter”.

RHB also highlights that the banks’ preliminary guidance for 2022 is a positive one as borders gradually open, which is expected to sustain recovery in business momentum.

Banks expect loan growth to be moderately higher than the pre-COVID-19 average of 5%, while net interest margin is expected to improve with the expected start in the US Federal Reserve rate hike cycle.

Fee income is also anticipated to still grow, albeit moderately as the low base effect in FY21. “We believe low double-digit growth in net fee income remains achievable in FY22,” the team says. Meanwhile, credit costs are expected to be benign, with an improving outlook resulting in repayments and recoveries. “Possible retention of Covid-19 general provisions for future cycles could, however, be a small dampener,” the tean cautions.

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The RHB team highlights that banks have begun signalling a pick-up in cost growth for the coming year, underpinned by investments to further boost digital capabilities and wage increases to retain talent. “That said, the rise in CIR could be kept in check by healthy income growth,” the team remarks.

To that end, the team has made “modest tweaks” to their forecasts for banks’ FY2021 to FY2022 earnings. Post 3Q21 results, we raise sector net profit by 2% for FY2021 on lower credit costs, but trim earnings by 1% for FY2022 due to higher opex assumptions,” they say.

RHB has kept their “buy” ratings for all three banks, though with a reshuffling in the pecking order.

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UOB remains their top pick, with the bank’s 9M2021 results highlighting its growing fee income base. In addition, RHB says the bank demonstrated healthy asset quality with robust general provision buffers, as well as the resumption of a 50% dividend payout. RHB has a target price of $33.50 for UOB.

DBS has replaced OCBC for the second spot. According to RHB, DBS’s 3QFY2021 results beat expectations. “Among Singapore banks, DBS would benefit the most from the expected interest rate upcycle. This coupled with structural changes brought about by its digital transformation and new regional growth platforms, will support richer valuations for the stock,” the team says. RHB has a target price of $40.40 for DBS.

Meanwhile, OCBC’s 3QFY2021 NIM slippage was “sharper than expected”, despite healthy loan growth recorded for the period. In addition, asset quality pressures linger in Malaysia and Indonesia. RHB has a $15.10 target price for OCBC.

Shares in UOB, DBS and OCBC closed at $25.57, $32.04, and $11.80 on Nov 12.

Photo: Bloomberg

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