SINGAPORE (Dec 12): DBS is upgrading OCBC to “buy” with target price of $10.30 as earnings are set to rise in anticipation of higher Net Interest Margins (NIM) and worries of the worst of NPLs (Non-Performing Loan) over.

DBS also likes OCBC for having a better wealth management unit as well as its ability to keep credit costs low compared to the rest of its peers.

In a recent report, analyst Lim Sue Lin says Singapore banks are set to deliver NIMs with rate hikes almost a certainty in the coming quarters.

“We have imputed a 8-10bps rise in NIM for FY17F,” says Lim, “our sensitivity analysis suggests that every additional 25bps increase SIBOR/SOR translates approximately to a 6bps increase in NIM (ceteris paribus), and will lift earnings by another 4%.”

The worst of the NPL issues seems to be over too, says Lim.

See also: <a class='gtm_see_also_1_inread' style='text-decoration: underline;' href='/capital/brokers-calls/dbs-says-it-remains-buyers-digital-core-reit-after-further-downside-price?utm_source=website&utm_medium=article&utm_campaign=ONPAGESEO'>DBS says it remains buyers of Digital Core REIT after further downside in price</a>

The Ministry of Trade and Industry recently announced enhanced support measures for the oil and gas sector in the form of new incremental loan facilities from SPRING Singapore and IE Singapore to Singapore-based industry players.

“We believe this has brought some relief to companies which are experiencing tight cash flow, and hence extend some respite to banks in terms of NPL incidences,” says Lim.

However, she remains watchful for some spillover effects to the construction sector and loans to individuals in the near term should the macro environment remain sluggish and unemployment rises to worrying levels.

But possible earnings surprises could emerge if asset quality recovers quicker than expected in FY17 with every 5bps decline in credit cost expected to lift earnings by 3%.

See also: <a class='gtm_see_also_2_inread' style='text-decoration: underline;' href='/capital/brokers-calls/rhb-sees-frasers-centrepoint-trust-potential-contender-mercatus-assets?utm_source=website&utm_medium=article&utm_campaign=ONPAGESEO'>RHB sees Frasers Centrepoint Trust as potential contender for Mercatus assets</a>

Since Trump’s victory and with more certainty of rate hikes, shares of Singapore banks have rallied by at least 8%.

“The market appears to be disregarding any downside risk to further NPL issues albeit on a smaller scale and the sluggish economy,” says Lim.

As for UOB, Lim is calling a “hold” with a higher target price of $21.80. Even though the bank has kept its buffer for NPLs it still lacks the allure of a wealth management play, says the analyst.

Shares of OCBC are down 16 cents at $9.10 while shares of UOB are down 4 cents at $20.86.

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