For the Singapore banks, trade-related assets account for around 10% of their loans and only 1% to 3% of these loans are exposed to the first order impact of the increase in US tariffs, according to the analysts.
Wong, Chen, Dickerson and Cheah add that while the second order impact is relatively uncertain, Singapore banks take comfort from relatively high provision coverage levels with OCBC at 162%, DBS Group Holdings (DBS) at 137%, United Overseas Bank(UOB) at 90% in the 1QFY2025, as compared to the Bank of China (Hong Kong) at 85% and Hong Kong and Shanghai Banking Corporation (HSBC) at 25% as of FY2024.
With this, the team at Jefferies have “buy” calls on DBS and UOB at price targets (PT) of $50.00 and $40.00 respectively.
On OCBC, they have a “hold” call at a PT of $17.00.
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The analysts write: “We trim our loan growth forecasts by around 1 percentage points (ppts) to 3 ppts on the back of a weaker outlook. That said, the recent de-escalation of the trade war probably means that the worst case scenario can be averted for now.”
In April, while the team saw that some Singapore banks rotated into less risky assets, they added that overall ongoing net new money inflows supported structural growth in wealth.
“All Singapore banks reaffirmed their capital return commitment. That said, given the macro uncertainties and a lack of earnings growth, incremental return is unlikely in the near term in our view,” write the analysts.
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In regards to possible merger and acquisitions (M&A), they note that DBS has maintained a strong discipline on the right pricing and integration feasibility for a strategic fit, with an eye on deals that will bring the group “forwards not backwards”.
As for OCBC, Wong, Chen, Dickerson and Cheah note that macro uncertainty could lower valuations for M&A, and the group’s management which also focuses on integration risk could therefore prefer to have a “bigger appetite” for portfolio acquisition rather than a full entity buyout.
The analysts write: “Since Liberation Day, we have remained confident in Singapore banks' resilience amid macro uncertainty, and in particular DBS' commitment to growth. We maintain our preference for DBS.”
On the other hand, they believe that UOB could see reduced earnings pressure if the outlook improves, and if some costs incurred from the acquisition of Citi’s consumer business in the region can “roll-off”.
OCBC's NIM headwinds, however, could result in larger-than-peer profit decline, according to them.
On May 19, the respective shares in DBS closed 30 cents lower or 0.67% down at $44.30, OCBC closed 9 cents lower or 0.55% down at $16.23 and shares in UOB closed 20 cents lower or 0.56% down at $35.30.
