Jefferies equity analysts Sam Wong and Shujin Chen have expressed their preference for Singapore banks over their Hong Kong peers.
“We are more excited about Singapore banks' longer-term return on equity (ROE) [and] growth potential from overseas franchise uplift, than on near-term capital return,” say Wong and Chen in their Jan 27 report.
The analysts consider capital returns to be a “key positive thesis” in the near term, although they believe that the banks may want to tie that to longer-term growth as opposed to a one-off surprise.
Following United Overseas Bank ’s (UOB)’s 3QFY2024 statement that it could conduct capital management initiatives, the bank could announce a $2 billion share buyback programme in the upcoming quarter. The transition of leaders could also introduce any new thoughts on capital management moving forward, Wong and Chen note.
Meanwhile, DBS Group Holdings could be planning for new growth initiatives in countries such as Malaysia and Indonesia under its new CEO, Tan Su Shan. Tan will succeed outgoing CEO Piyush Gupta in March this year. As such, the analysts only see a “modest increase” in its annual dividend to 32 cents from 24 cents to reiterate the group’s optimism on future growth, as opposed to a special dividend.
For Oversea-Chinese Banking Corporation (OCBC), any near-term scope is limited by the deadlock in the privatisation of Great Eastern Holdings and a potential merger in Indonesia. Instead, the analysts have lowered their buyback assumptions for FY2025 to $1 billion from $2 billion previously.
See also: DBS is RHB’s top pick with dividend yield ‘too good to ignore’
Improved ROE outlook
The analysts believe all three banks could achieve higher return on equity (ROE) should they execute their overseas strategies well. For FY2025, the analysts project ROE improvements of 0.7 percentage points for DBS, 0.5 percentage points for UOB and 0.4 percentage points for OCBC on the back of improvements in their overseas operations.
DBS is expected to maintain its ROE target of 17% to 18% in FY2025. UOB is also likely to achieve its ROE target of 14%, which is currently not priced in.
Other positives
Wong and Chen also highlight the scarcity value of Singaporean banks, given the risks in other markets such as Thailand’s “somewhat challenging” macro environment, Indonesia’s marginal deterioration in asset quality and Malaysia facing “noise” around its chip supply.
The banks’ total shareholder return (TSR) yield of 5% to 7% is also ahead of other Singapore sectors such as Singapore REITs (S-REITs).
4QFY2024 results likely to be on track
Ahead of the banks’ 4QFY2024 ended Dec 31, 2024, results, Wong and Chen believe all three banks’ results for the quarter are likely to be “on track”.
DBS is estimated to report a slightly higher net interest income (NII) on a q-o-q basis in the 4QFY2024 from a high exit net interest margin (NIM) while UOB is likely to see stable q-o-q NII as any moderation in NIM may be offset by growth in loans. At the same time, OCBC is seen to be on track to deliver its FY2024 target NIM of 2.2%.
That said, fee income across all three banks, especially for wealth, may face q-o-q declines due to seasonality as well as the high base in 3QFY2024.
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The banks’ asset quality is also estimated to deliver against their full-year targets.
To the analysts, UOB’s commercial real estate (CRE) related specific provisions (SP) could remain relatively elevated although offset by better performance in Thailand and the release of general provisions (GP).
Meanwhile, DBS and OCBC could increase their GPs for their Hong Kong CRE portfolio in 4QFY2024.
Regarding recent developments with Hong Kong’s New World Development (NWD), Wong and Chen estimate DBS and OCBC to have an average exposure of around HK$2 billion ($347.48 million) per bank, equating to around 10 basis points (bps) of loans. UOB’s exposure is believed to be smaller.
The analysts say they do not see NWD being downgraded to a non-performing loan (NPL) in the near term, but suggest that a stage 2 downgrade will likely result in low-single-digit bps worth of provisions, depending on the collateral levels. However, the analysts say they are not surprised if banks pre-emptively make some GPs in advance this quarter for their HK CRE portfolios.
UOB top pick
Within the three banks, the analysts prefer UOB, DBS and OCBC in that order.
Long-only investors seem to prefer DBS for its strong track record while monitoring UOB’s progress. Meanwhile, hedge funds are concerned about positive catalysts being fully priced in for UOB. They are also watchful for any positive surprises from OCBC.
Wong and Chen have rated all three banks at “buy” with target prices of $49 for DBS, $42 for UOB and $19 for OCBC. They estimate DBS’s earnings per share (EPS) to be at $3.99 for FY2024, UOB’s to be at $3.49 and OCBC’s to be at $1.69.
DBS will report its results on Feb 10, while UOB and OCBC will announce their results on Feb 19 and 26 respectively.
Shares in DBS closed 13 cents higher or 0.3% up at $43.73 while UOB’s shares closed 15 cents lower or 0.41% down at $36.87. Shares in OCBC closed 5 cents lower or 0.29% down at $17.04 on Jan 28.
