SINGAPORE (Apr 2): DBS Vickers Securities is remaining bullish on Singapore’s banks as a dividend yield play, while highlighting rising mortgage rates as the sector’s bright spot amid higher cost of funds this year.

In a Tuesday report, analyst Lim Rui Wen says UOB will benefiting from hikes in mortgage rates in 1Q19, as it was the first to increase it Singdollar fixed deposit rates during February this year.

According to UOB, its mortgages based on fixed deposit rates may grow up to 70 basis points.

This is compared to OCBC Bank, which announced average hikes of 55 basis points back in December 2018, effective from Jan 2019. DBS, on the other hand announced an increase of up to 40 basis points with effect from April.

Lim has “buy” calls on both OCBC and UOB with the respective price targets of $12.90 and $29.20.

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In her view, the two banks are trading at undemanding valuations of just over 1 times FY19F book value, and are well-supported by relatively generous dividend yields of more than 4%.

While Singapore interbank offered rates (Sibor) are going up as well, the analyst notes that there is typically a lag between repricing and Sibor – meaning that the banks are able to enjoy a period of wider margins.

She estimates that between 40 to 45% of the banks’ Singdollar loans are based off Sibor and the swap offer rate.

Going forward, DBS expects Singapore’s GDP to grow at between 2.8-3% this year and the next to support mid-single digit growth in banks’ earnings.

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This will be further buoyed by continued NIM expansion through FY19F on further loans repricing, says Lim, although she remains cognisant that loan growth is expected to moderate to c.4-6%, hinging on non-trade corporate loans and regional loan demand.

“Singapore banks remain as decent dividend yield play amid strong capital levels, benign asset quality with mid-single digit earnings growth and will likely trade range-bound up till ex-div dates. In the meantime, we continue to keep watch on developments in oil and gas provisions,” says Lim.

Shares in OCBC closed 14 cents and 32 cents higher, respectively at $11.35 and $25.74 on Tuesday.

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