With lower rate cut expectations in 2025 and improving loan growth, Phillip Securities research analyst Glenn Thum is remaining “overweight” on Singapore’s banking sector.
With just two US Federal Reserve rate cuts expected this year, the decline in net interest income (NII) and net interest margin (NIM) of Singapore’s three banks will “soften”, says Thum. Banks’ trading income could also further benefit from a rise in trading volume amid “more buoyant” capital markets, he adds.
Furthermore, the continued double-digit growth in fee income and a loan growth recovery will boost earnings, adds Thum in a Jan 3 note.
Finally, there is a further upside to dividends as the banks look to manage excess capital actively, and a possibility of share buybacks will improve return on equity (ROE) and earnings per share (EPS), says Thum.
Among the three banks, Thum prefers Oversea-Chinese Banking Corporation (OCBC) and United Overseas Bank (UOB) over DBS Group Holdings.
OCBC has “attractive valuations” and a dividend yield of 5.4%, buffered by a “well-capitalised” 15.6% common equity tier-1 (CET-1), and non-interest income growth from recent acquisitions, says Thum.
The analyst praises UOB’s “stable” NII and NIM, achieved through cutting deposit costs and increasing loan margins. “Other tailwinds such as loan growth recovery from rate cuts and double-digit fee income growth will [also] boost earnings.”
Thum has “accumulate” calls on both OCBC and UOB, with target prices of $18.80 and $39.70 respectively. Thum also has an “accumulate” call on DBS, with a target price of $44.70.
See also: Sea is DBS’s ‘top pick’ as Shopee set to benefit from live commerce and AI investments
Non-interest income boost
All three banks have maintained their NIM guidance at 2% to 2.25% for FY2024, with expectations for NIMs to decline from these levels in FY2025.
This is mainly due to a decline in interest rates in 2H2024 and an expectation for more rate cuts in FY2025.
However, the banks have guided for higher loan growth as interest rates continue to decline in FY2025, with guidance for mid- to high-single-digit loan growth for FY2025.
The banks will also look to lower their funding costs to maintain NIMs, with fixed deposit (FD) and current account and savings account (CASA) rates being cut.
That said, non-interest income will provide a boost. The banks expect fee income to continue the strong growth from the sustained shift in investor sentiment as funds move to higher-yielding products like investment and bancassurance.
As such, they have guided for high-single-digit fee income growth for FY2025.
For more stories about where money flows, click here for Capital Section
Thum notes that there is an upside from trading income due to the heightened volatility surrounding the incoming Donald Trump administration in the US and uncertainty over Fed rates. “We expect non-interest income to offset the NIM and NII growth stagnation and be the growth driver for FY2025.”
The three banks are expected to release their financial results for 4QFY2024 and FY2024 ended Dec 31, 2024 in February.
As at 4pm, shares in DBS are trading 35 cents lower, or 0.8% down, at $43.61; while shares in OCBC are trading 10 cents lower, or 0.6% down, at $16.54; and shares in UOB are trading 9 cents lower, or 0.25% down, at $36.46.
Table: Phillip Securities
