SINGAPORE (Oct 23): Phillip Capital is upgrading the Singapore banking sector to “accumulate” from “neutral” as the research house rolls over its FY18 valuations.

Phillip says macro conditions continue to be positive while sentiment in domestic markets are improving as capital and property markets have livened up. Higher interest rates and loan volume are also expected to drive Net Interest Income higher.

“We are maintaining our ‘reduce’ rating on UOB but upgrading our rating on DBS from ‘accumulate’ to ‘buy’ and upgrading our rating on OCBC from ‘neutral’ to ‘accumulate’,” says Jeremy Teong in a Friday report.

For one, y-o-y loans growth is expected to slow down in 2H17 because of the higher base in 2H16. Phillip expects business loans to continue to be strong as the global economy continues to strengthen while consumer loans growth should accelerate in FY18 as en bloc property sales gain momentum and public construction loans pick up after an extended hiatus.

Meanwhile, banks have been rolling out housing loans packages that are less sensitive to SIBOR because of intensifying competition. It it estimated that housing loans make up about 15% to 20% of the Singapore banks’ loans book.

In addition, offshore oil & gas non-performing loans formation are expected to remain stable in 2H17. Though day rates have continued to be low while oil price is hugging the US$50 ($68) mark, there has been improvements in the utilisation rate at the beginning of the year and more rigs have been put to work.

“We believe the green shoots of recovery in the industry would limit further deterioration of the offshore oil and gas assets,” says Teong who expects strong 3Q17 earnings performance as NII is seen to increase 6% to 11% y-o-y and provision expenses decline sequentially across the three banks.

“We expect UOB’s 3Q17 PATMI to be $850 million, up 7.7% y-o-y; DBS’ PATMI to be $1,306 million, up 21.9% y-o-y and OCBC’s PATMI to be $1,182 million, up 25.3% y-o-y,” says Teong.

As such, Phillip has increased FY18 target prices to $25.70 for DBS from previous FY17 target price $21.45; to $21.61 for UOB from FY17 target price $20.18 and $11.95 for OCBC from $10.81.

Shares in DBS, UOB and OCBC are trading at $21.88, $24.26 and $11.49 respectively.