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Singapore banks on recovery path, PhillipCapital picks OCBC for faster earnings growth

Jovi Ho
Jovi Ho4/9/2021 1:42 PM GMT+08  • 4 min read
Singapore banks on recovery path, PhillipCapital picks OCBC for faster earnings growth
Last week, analysts from CGS-CIMB Research and DBS Group Research advised investors to accumulate on Singapore bank stocks.
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With a positive economic outlook, PhillipCapital is maintaining “overweight” on the Singapore banking sector, as loans remain on the path of recovery and interest rates are stable.

In an April 5 note, PhillipCapital analyst Tay Wee Kuang is maintaining his calls on the three banks: “accumulate” for DBS and United Overseas Bank (UOB) with target prices $29.50 and $25.80 respectively.

He prefers Oversea-Chinese Banking Corporation (OCBC), maintaining “buy” on the bank with a target price of $13.65. “OCBC is expected to book faster earnings growth from its wealth-management and insurance franchises as market conditions improve.”

“Despite the run-up in their share prices in 1Q2021, we continue to see upside for banks. They had traded above 1.4x price to book ratio (P/B) before in the past five years and are currently trading close to or below our P/B targets of 1.17x to 1.31x,” notes Tay.

“Our targets are supported by improving return on equity (ROEs) as allowances ease off in FY2021. The banks have also emerged from FY2020 with stronger capital ratios of 13.9-15.2%. These are higher than their ideal operating range of 12.5-13.5%, which banks hope to achieve so as to not negatively impact ROEs from holding excess capital. This should support a resumption of pre-Covid dividend payouts once the Monetary Authority of Singapore (MAS) lifts restrictions,” he adds.

Last week, analysts from CGS-CIMB Research and DBS Group Research advised 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 MAS in FY2020.

See: Analysts positive on Singapore banks on easing of dividend cap and sustained loan growth

Interest rates edged higher for a second consecutive month to 0.42% in March, notes Tay. Year to March, they were up 11 bps. Still, the rates were 53 bps lower than their FY2020 average. “We continue to expect FY2021 net interest margins (NIMs) to come in at 1.45-1.55% for the three banks, lower than their 1.60% average in FY2020.”

Meanwhile, lending recovery was extended to February. Loans fell 0.88% y-o-y in February but grew for the fourth consecutive month, by 0.46%. Business and consumer loans improved 0.48% and 0.42% m-o-m respectively.

“The pace of recovery dipped from the 0.72% m-o-m gain observed in January but consumer loans grew 0.1% y-o-y in their first annual growth since April 2019. Apart from the recovery in local loans, local banks should benefit from regional trade flows with their presence in North Asia and Southeast Asia, where vaccination programmes are underway to aid the economic recovery,” writes Tay.

That said, market activities fell in March. Preliminary securities daily average value (SDAV) for March of $1,627 million was the third highest historically. SDAV was down 26% y-o-y from the $2,193 million in March 2020, when there was a market selloff at the height of the global outbreak of Covid-19.

Turnover for the top five equity index futures shrank 32.1% y-o-y in March. Again, this could be attributed to less volatility than a year ago, which dampened demand for derivatives as a hedging tool. Singapore Exchange’s (SGX) income could slide 10% y-o-y in 3Q2021 as a result of base effects, but is expected to normalise after that, says Tay.

UOB Kay Hian Research analyst Jonathan Koh is more optimistic on DBS, upgrading it to “buy” with a raised target price of $32.95 from $30.30 before.

“Recovery from the pandemic is getting entrenched with a series of fiscal stimulus lined up to pump-prime the US economy. Government bond yields are expected to remain firm with an upward bias. We raise our 2021 earnings forecast by 10% after adjusting credit costs lower from 40 bps to 31 bps as asset quality improves. The second wave of Covid-19 infections in India has limited impact on DBS as India accounted for only 1.5% of DBS’ total loans,” writes Koh.

Meanwhile, RHB Group Research is maintaining its “buy” call on OCBC, with a target price of $13.30. “The economic recovery, although uneven, is becoming increasingly visible. This, we believe, will support the continued positive re-rating in OCBC’s share price,” says RHB.

“We like that its wealth management business will support its topline, before loan growth picks up from 2H2021… Its loan book has also been cleaned up, with legacy oil & gas exposures written down, while loans under relief comprise only 2% of loans,” they add.

As at 1.04pm, shares in DBS are trading nine cents lower, or 0.31% down, at $28.62; while shares in UOB are trading one cent lower, or 0.039% down, at $25.94; and shares in OCBC are trading three cents lower, or 0.25$ down, at $11.78.

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