UOB Kay Hian Research has maintained its ‘overweight’ rating for the Singapore banking sector on the back of higher bond yields, economic recovery following the Covid-19 vaccine rollout, moderation in credit costs, and better dividends.

UOB Kay Hian analyst Jonathan Koh notes that Singapore government bond yields have surged in tandem with US bond yields, with the yield for 10-year Singapore government bonds up by 71 basis points year-to-date to 1.55%.

Koh expects yields to remain firm as the US anticipates rapid economic recovery driven by optimism over Covid-19 vaccinations and stimulus spending, including the US$1.9 trillion ($2.56 trillion) American Rescue Plan that was recently signed off. US GDP is projected to expand by 5.5% in 2021 and 3.8% in 2022, while the job market bounced back with 379,000 jobs created in February.

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Singapore banks will benefit from the higher bond yield as they foreshadow higher future interest rates, and reduced competition from the bond markets as an alternative source of funding for corporate customers.

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In addition, Singapore’s Covid-19 vaccination programmme, which is expected to complete by 3Q2021, will promote economic recovery that will benefit the banks as consumer behaviour and domestic consumption normalises.

Koh’s picks for the sector include DBS Bank (rated ‘buy’ with a target price of $30.30) and Oversea-Chinese Banking Corporation (OCBC) (rated ‘buy’ with a target price of $14.68). The recommendations are underpinned by the banks’ strong common equity Tier 1 capital adequacy ratios which Koh says places them in a position to bring dividends per share (DPS) back to pre-pandemic levels.

“We envisage a two-step process in normalisation of dividend payout back to their pre-Covid-19 levels. We expect DBS to pay 30 cents per quarter in 2021 and 33 cents per quarter in 2022. We expect OCBC to pay 25 cents per half year in 2021 and 28 cents per half year in 2022,” he says.

Koh forecasts  DBS and OCBC to provide dividend yields of 3.9% and 4.3% for 2021 and 4.7% and 4.8% for 2022 respectively. 

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Koh also anticipates a moderation in costs following the expiry of the loan moratorium. Both DBS and OCBC’s exposure to loans under moratorium have declined, with Koh expecting DBS’ credit costs to drop from 80 basis points ($3 billion) in 2020 to 40 basis points ($1.6 billion), while OCBC’s credit costs are expected to drop 77 basis points ($2 billion) in 2020 to 33 basis points ($0.9 billion) in 2021. 

As at 4.33pm, shares in DBS are 31 cents or 1.11% higher at $28.33, while shares in OCBC are 2 cents or 0.17% higher at $11.60.