CFA Society Singapore
SINGAPORE (July 19): DBS Vickers Securities expects an “interesting” 2Q18 earnings season with diverging trends across Singapore’s banks as they continue to spend on improving technology infrastructure, with some potential for slight upticks in personnel costs for salary revisions.
While the research house has rated both UOB and OCBC at “hold” with target prices of $28.30 and $12.20, respectively, it prefers the former as a more attractive dividend play on expectations of at least a 40-cent interim dividend to be declared for the quarter.
In comparison, DBS is anticipating an interim dividend of at least 19 cents for OCBC with little expectations of any further upside due to a lack of excess capital, due to the high capital consumption of its insurance operations.
While this may change once OCBC-WHB adopts the Internal Ratings Based (IRB) model for its capital by end-FY19, which could see the release of an additional 40bps of capital, DBS also prefers UOB for its more imminent NIM uplift given its smaller Hong Kong presence, and tendency to be less affected by trade loans when compared to OCBC.
“As at 1Q18, CET1 ratios for UOB and OCBC were at 14.9% and 13.1% respectively,” notes analyst Lim Sue Lim in a Thursday report.
Comparing the two, she thinks UOB should still see some NIM uplift as OCBC’s NIM might disappoint.
“With the ongoing trade war saga, there may be slight impact on the banks’ trade loans and loan-related fees [this 2Q18 earnings season]. UOB has less exposure to trade loans and hence should still continue to see loan growth at 2% q-o-q, driven largely by property-related loans. However, OCBC may see some weakness in loan growth due to softened trade loans. Comparatively, UOB should see strong loan growth q-o-q vs OCBC,” she adds.
In all, Lim believes both banks should see relatively benign credit costs ranging from 20-25bps – although she highlights that their valuations have declined from 1.2 times FY18F book value from a peak of 1.4 times FY18 book a few months ago, largely due to profit-taking after positive 1Q18 results and dampened sentiment resulting from recent property cooling measures.
“Things to watch in coming quarters would include stronger- than-expected USD strength which will cause pass-through to SGD rates to be more significant and more-than-expected rate hikes, leading to NIM uptrends, sustainable loan growth (we have trimmed our loan growth to 7% for 2018 and 6% from 2019 following the property cooling measures), and robust asset quality and capital conditions,” concludes the analyst.
As at 10:28am, shares in UOB and OCBC are trading at $26.25 and $11.24, or at the respective valuations of 10.4 times and 9.6 times FY18F book.