SINGAPORE (Mar 20): Maybank Kim Eng is upgrading Singapore's banking sector to "positive" from "neutral" on stronger loan growth, NIM improvement, higher non-interest income and lower provisions.
According to Maybank, Singapore banks’ overall loan growth is expected to head higher as the multiplier between the bank’s overall loan growth and GDP growth is 2.7 times on average since 2Q09.
However, with key residential, mixed-use and commercial land deals expected to contribute just 2% to housing loans and 1% to building and construction loans each year over the next 3-4 years, Maybank says loan growth unlikely to head into high double-digits over its forecast horizon.
Nevertheless, Maybank expects wealth management to be a key revenue driver for the banks.
"We raised non-interest income by 6-14% for OCBC and 2-6% for UOB across FY18-20," says analyst Ng Li Hiang in a Tuesday report.
Ng is turning more positive on OCBC’s wealth franchise given its cross-selling abilities across its wealth platform, onshore private banking facilities in Indonesia and increase in assets managed by the Bank of Singapore.
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Meanwhile, given UOB’s wealth management franchise is "underappreciated", Ng says there is grounds for further fee growth given UOB's organic AUM has grown by a "respectable" seven-year CAGR of 12% through 2017.
Maybank's order of preference is UOB, OCBC with DBS in third place given the bank's positives have already been priced in for now.
Ng believes OCBC’s valuation multiple deserves to increase in view of its ability to expand ROEs from non-interest income growth.
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In addition, OCBC could benefit from Great Eastern Holdings’s higher insurance contribution from its robust underlying operational performance.
"With Great Eastern a dominant player in Singapore and Malaysia, we expect a three-year CAGR of 22% for insurance contribution," says Ng.
The research house is raising FY18-20 profit estimates for UOB by 2-5% and OCBC by 4-12% while loan growth assumptions for UOB and OCBC have been raised to 9-10% and 10% respectively.
"We like UOB’s pricing discipline and sensitivity to re-pricing intervals, and a catalyst is potential dividend upside," adds Ng.
Maybank's target P/BV for banks has been raised to 1.4-1.6 times from 1.3-1.6 times, above their historical mean of 1.2-1.3 times to reflect higher forecast ROEs.
As at 12.13pm, shares in OCBC are up 9 cents at $13.27, shares in DBS are up 4 cents at $28.11 while shares in UOB are down 5 cents at $28.05.
