Both DBS and UOB have been rated “buy” with the respective target prices of $30.18 and $30.50.
In a Wednesday report, analyst Thilan Wickramasinghe says he is anticipating continued NIM expansion in spite of a slowing loan growth environment, as the sector leaves the growth phase of its cycle to enter consolidation.
This is because asset yields are re-priced upwards amid falling y-o-y credit costs, which should in turn support improving returns on equity (ROEs) and robust dividends for the local banks, in his view.
“We estimate that adjusted sector NIMs expanded 13bps y-o-y in 2018E, led by DBS. Of our two top picks, UOB has lagged here, with average NIMs rising just 6bps in 9M18. But its momentum should pick up, from mortgage-yield repricing in 2H18 and pre-funding-costs wash-through,” says Wickramasinghe.
“UOB increased deposits by 8% between 4Q17 and 9M18 versus just 2% for DBS and OCBC. We will follow guidance on 2019 NIMs closely, particularly relating to funding-cost competition,” he adds.
Meanwhile, Wickramasinghe foresees a continued slowdown in new non-performing asset (NPA) formation over 4Q18, and believes slower loan and mocroeconomic growth may raise risks to asset quality in the near term.
On this, he comments: “Especially with pro-cyclical provisioning requirements under IFRS9 that typically result in accelerated provisioning when asset quality deteriorates, we will be watching for signs of any sector risks.”
Noting that the general banking sector has been investing heavily in recent years, the analyst says he will also be looking out for evidence in 4Q on how these tech-centric initiatives are supporting opex management.
“Concurrently, we will observe how these investments are opening new revenue streams, especially as the banks move towards open banking platforms with increased collaboration among themselves, fintechs and the regulators,” he adds.
As at 3pm, shares in DBS, UOB and OCBC are trading at $24.87, $25.90 and $11.65, respectively.
