SINGAPORE (Dec 4): DBS Vickers Securities is maintaining its “buy” for United Overseas Bank (UOB) and Oversea-Chinese Banking Corp (OCBC) with target prices of $29.50 and $13.20.

In a Tuesday report, analyst Lim Rui Wen notes that UOB is offering close to 5% yield and OCBC, at around 4%.

In particular, she prefers UOB for its strong capital position and the ongoing build-up of its liquidity buffers; continuous growth in loan book and expected NIM expansion; as well as the bank as a defensive pick in general, as it has a smaller exposure to China among the local banks and more defensive wealth management franchise.

On the other hand, DBS’s “buy” rating on OCBC is premised on ongoing NIM expansion on full impact of loan repricing; stronger capital position post scrip dividend issue; and potentially higher dividends as a price catalyst.

Going forward, the analyst believes Singapore banks’ sustainability of NIM expansion and asset quality will determine their valuations.

She is expecting NIM to be on an uptrend in 2019, and forecasts a y-o-y improvement of at least 6-7bps next year compared to about 8bps in 2018.

“Our sensitivity analysis indicates that every 25-bp rise in interest rates that reprices the S$, HK$ and US$ books collectively would lift NIM by 3bps with a corresponding 2% increase in sector earnings. We expect credit costs to trend higher y-o-y, inching towards more normalised levels in the coming year due to the low base in 2018,” Lim explains.

“We continue to keep watch on SME loans as an increase in non-performing loans (NPLs) may be reflective of a slowing economy. Asset quality stability and higher earnings growth (above historical average) in FY19-20F should drive Singapore banks’ valuations towards 10-year average P/BV multiples,” she adds.

Another trend to watch in 2019 is the moderation of banks’ loan growth to moderate from its currently-high base, due to a decline in new home sales post property cooling measures, and weaker business sentiment arising from the US-China trade war.

“In the longer-term, we continue to see Singapore banks as potential beneficiaries from tride diversion into the Southeast Asian region,” says Lim.

As at 1.03pm, shares in OCBC and UOB are trading at $11.46 and $25.55, respectively.

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