JP Morgan initiated coverage of Sembcorp Industries U96 (SCI) with an underweight rating. Its reasons include this year’s outperformance by SCI’s share price coupled with a valuation metric of 11x ebitda. Every 10% decline in tariffs could cause SCI’s earnings to fall by 6% to 7%, JP Morgan estimates. On the other hand, a potential inclusion in MSCI Singapore next month would be a positive catalyst.
In mid-June, Morgan Stanley said the positives for Singapore Airlines C6L such as strong fundamentals and favourable fuel prices have been priced in, causing a dent in SIA’s rally.
In May, after DBS Group Holdings’ investor day, JP Morgan maintained its underweight recommendation. “The stock is at risk of meaningful weakness over the next three to six months as the economy slows,” it said.
In JP Morgan’s view, weaker asset quality is likely to be the largest drive of stock price moves. The high interest rate environment may not be much of a tailwind this year as the local banks including DBS have already reaped the benefits. From now on, cost of funds is rising while loan yields are likely at their zenith. Meanwhile, banks’ cost of equity may stay high as risk-free rates stay at elevated levels.
On the flip side, JP Morgan recognises that the local banks have superior asset-liability management. Hence, if DBS can manage its asset quality well (with credit costs remaining low) the stock could re-rate sharply upwards.
On July 5, after Oversea-Chinese Banking Corp (OCBC) unveiled its One Group Strategy to much aplomb in Hong Kong, where the bank’s top management projected an additional $3 billion in income, CGS-CIMB said it expected its 2QFY2023 net profit to “soften”.
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“We expect 2QFY2023 net profit to soften to $1.74 billion (down 8% q-o-q, up 17% y-o-y),” CGS-CIMB says. Net interest margins (NIM) which impact net interest income (NII), (still the largest income component among the local banks), “could slide several basis points given heightened funding cost pressures” CGS-CIMB adds.
Wealth Management income is unlikely to be boosted by the risk-off sentiment through much of 2Q2023. Hence, the boost from NII fades while wealth management income remains underwhelming.
Great Eastern Holdings’ earnings will be interesting following the adoption of SFRS(I) 17, which should remove the volatility from mark-to-market gains and losses.
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Trends are likely to be similar for United Overseas Bank U11 (UOB). However, in the longer term, following the acquisition of the Citigroup retail book in the Asean-4, UOB’s Vietnamese business could be given a boost.
Much has been made of Vietnam’s potential in the foreign press since the start of July. And interestingly, Second Minister of Trade and Industry Tan See Leng will attend the 7th Singapore Regional Business Forum (SRBF) in Hanoi on July 7 as co-Guest-of-Honour, with Vietnam’s Prime Minister Pham Minh Chinh. This is the first time that the SRBF, organised by the Singapore Business Federation, is held outside of Singapore, with more than 260 Singapore companies participating.
With a darkening macro outlook for both Singapore and China, both DBS and OCBC O39 ’s share prices may not be able to rally. The chart pattern of DBS showed an attempt at a double bottom, but a breakout above the top of the base at $32 remains elusive. Support is at $29.80. Its trading range may continue within a narrow band.
