CFA Society Singapore
SINGAPORE (Mar 18): Maybank Kim Eng is keeping “positive” on Singapore’s banking sector while noting significant interest among Malaysian investors in Singapore banks from a flight-to-quality angle, and for their high dividend yields as the SGD appreciates.
This comes post a meeting with 15 Malaysian investors from a mix of long-only, hedge and private-banking funds to discuss Singapore banks and Maybank’s stock calls on them – for which the research house says was very little pushback on its top picks DBS and UOB, both rated “buy” with the respective target prices of $29.56 and $29.71.
OCBC, on the other hand, has a “hold” rating and price target of $10.73.
In a Friday report, analyst Thilan Wickramasinghe highlights investor concerns over asset quality, rising funding costs and the long-term impact of technology and fintech platforms.
Despite investor worries over higher credit charges in view of regional economic volatility, he thinks non-performing loans (NPLs) are likely to remain contained this year given 2018’s sector stability even as credit charges dipped to their lowest in 12 years.
The analyst has forecast a 5bp rise in credit charges by 2020E to factor in the “known unknown” of the impact of IFRS9, which will require pro-cyclical previsioning, although he says strong regulatory capital ratios should provide additional downside protection.
“We think any major asset-quality distress may result in higher-than-expected credit charges. This needs to be closely watched,” he cautions.
On the subject of concerns over NIM sustainability, Wickramasinghe says domestic banks – which hold around 50% of low-cost deposits in their mix and are currently pricing up their loan books – should support a 5-6bp NIM expansion for the overall sector despite a 76bp increase in funding cost assumptions for 2019E, versus the 35 bps increase in 2018.
“We also expect loan growth of 6% YoY, underpinned by growth in regional markets where 60% of Singapore bank loans now originate,” adds Wickramasinghe.
The analyst also believes domestic banks have an entrenched position to withstand competition from fintechs, given their stronger networks and client depths which he reckons fintechs will find hard to replicate.
At the same time, he thinks the overall banking sector will be able to benefit from the faster innovation cycle offered by fintechs, such as through partnerships between DBS and GoJek as well as UOB and Grab.
“Given higher IT spending by the sector to streamline systems, it is unlikely that cost-to-income ratios will fall in the medium term. But we expect this trend to reverse when tech-related savings and new revenue begin to flow through in the long term,” he comments.
As at 10:50am, shares in DBS, UOB and OCBC are trading at $25.30, $25.34 and $11.19, respectively.