SINGAPORE (Mar 11): CGS-CIMB Research says current bank valuations have priced in downside risks of a pause in US Federal Reserve rate hikes on sector earnings.

Absence of asset quality pressure should also prevent de-rating.

“Maintain ‘Overweight,” says analyst Andrea Choong in a Friday report with DBS Group Holdings, United Overseas Bank and Oversea-Chinese Banking Corp in order of preference.

Choong says valuations should find support at 1.1x CY19F P/BV as current circumstances do not warrant a de-rating to levels seen during the oil & gas downturn or global financial crisis when the sector traded in the range of 0.9-1x P/BV.

She also says NIM (net interest margin) should see upside in 2019F from delayed effects of asset repricing although optimism on rising interest rate has diminished.

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In 4Q18, net interest margin (NIM) trends diverged with DBS/OCBC/UOB posting +1/0/-1bp q-o-q changes.

Choong says DBS’s strong CASA (current and saving accounts) base continued to underpin the rise in its non-trade loan yield spread while a sharper rise in deposit costs capped margin expansion at OCBC and the small rise in UOB’s loan yields was a function of its 4Q18 loan growth to the lower-yielding corporate segment.

‘We think there is still room for a 2- 5bp NIM increase in 2019F (2018: 5-10bp) as mortgage board rates catch up to Sibor-pegged loan rates,” says Choong. In 4Q18, 3M Sibor rose further to an average 1.9% in 2M19 vs. 1.73%. More margin upside could come from a reversal of Hibor’s current downtrend.

Finally, volatile market performance to be supported by resilient fee income. In 4Q18, reduced customer activity weighed on trading and wealth management income. In particular, these income segments were the lowest recorded for OCBC in two years.

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“While the banks have flagged for possibly dimmer market-related income in 2019F in view of continued macroeconomic uncertainty, recurring fee income from cash management, bancassurance and loan-related services should support non-interest income growth,” says Choong.

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CGS-CIMB has DBS and UOB at “add” with similar target prices of $29.00 and a “hold” with target price of $12.00 for OCBC.

“DBS displayed the strongest NIM performance in FY18, although upside going forward could be more moderate. Dividend yield of 4.7% in FY19F provides some support for the share price,” says Choong.

Meanwhile, “UOB’s market-related income lines were least-affected by the 4Q18 volatility among peers, given the bank’s smaller trading book and structure of its wealth management franchise which generates more stable, recurring fees.”

As at 3.57pm, shares in DBS, UOB and OCBC are trading at $25.11, $24.81 and $11.03 respectively.

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