“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.
