SINGAPORE (Aug 1): While trade frictions and property cooling measures may slow loan growth for Singapore banks, rising interbank rates should help margins and offset revenue pressure.
Meantime, banks continue to invest in wealth management and digitalisation which should support non-interest income and operating efficiency.
“Idiosyncratic risks reside but credit costs should stay stable. Adequate capital buffers offer dividend upside. Buy DBS, OCBC, UOB,” says Jefferies analyst Krishna Guha in a Tuesday report.
Although Guha does not dismiss potential headwinds, the three banks have diversified geographic footprint and revenue sources.
Despite various trade-related issues, system loans grew 9% as of May. In fact, no slowdown in growth rate have been seen since early 2017. However, utilisation levels are not growing, unlike in previous cycles.
Jefferies expects 2% q-o-q loan growth forecast for the year. The house also highlights that the 3.5% q-o-q strengthening of the US dollar should help the bottom line. USD/HKD denominated loans account for 40% of loan book for DBS and OCBC.
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3M Sibor is up 23bps q-o-q and 52bps y-o-y, which is in line with rising USD interbank rates. In July alone, Sibor is up an additional 10bps. Jefferies estimates that every 50bps increase in 3M Sibor improves profit by 3-8%, benefiting DBS the most.
This means a 10bps increase in Sibor should offset the impact of decline in loan growth by a couple of percentage points. Banks have some room to shift asset mix as LDRs (Loan-deposit ratios) are below 90% with DBS, OCBC and UOB at 89%, 85% and 88%.
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That said, SGD deposit cost is increasing. Since early this year, six-month fixed deposit rates are up 20 bps from competing banks. Further, SGD yield curve continues to flatten, which will not help gapping income.
“We expect q-o-q margins to increase 2-3 bps while for FY18, we expect 10 bps, 8 bps and 4 bps increase in margins for DBS, OCBC and UOB, respectively. While the three counters are down 11% on average over last three months, we think fundamentals are intact and we maintain ‘buy’,” says Guha.
DBS, UOB and OCBC report 2Q results on Aug 2, 3 and 6 respectively. For DBS, Jefferies has a price target of $35 or 15 times 12-month forward EPS of $2.33. OCBC has a price target of $15.20 implying 13 times 12-month forward EPS of $1.17. For UOB, its price target of $34 implies 13.4 times 12-month forward EPS of $2.54.
As at 11.36am shares in DBS, UOB and OCBC are trading at $26.91. $27.12 and $11.57 respectively.
