US President Donald Trump’s reciprocal tariffs have injected further uncertainty into the market, write the analysts in an April 22 note, but the pause “provides investors with a reprieve and an opportunity to reposition”.
RHB Economics has turned more cautious on the global macroeconomic outlook, and RHB’s analysts have accordingly trimmed FY2025 to FY2027 sector earnings by 3%, 3% and 2% respectively.
The analysts cite a more cautious macroeconomic outlook, with the base case (55% assigned probability) of US universal tariffs rising by another 10% to a total of 20% in 2H2025.
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A bear case (40% probability) sees a return of reciprocal tariffs being implemented in 2H2025 at similar to or higher than the rates introduced on April 2, they add.
Where is the bottom?
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Given that share prices move ahead of fundamentals, RHB has assessed potential landing spots if the situation deteriorates further.
Top down, the analysts think history can offer useful parallels. Singapore banks are down 13% from the peak, they note.
Based on the Eurozone debt crisis of 2011, the commodity price crash of 2015 and Covid-19, the sector saw a peak-trough drop of 30%, suggesting the possibility of a potential downside of almost 20% from current levels if conditions worsen.
“However, this time round, banks are dishing out dividends and returning capital to shareholders. If the latter remains intact, the potential downside could be milder,” they add.
Where are potential soft spots?
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RHB analysts think the risks from slowing global growth for Singapore’s banks lie mainly in operating income.
Weakening export demand and slower economic activities will impact trade as well as working capital loan demand, in their view.
Also, in uncertain times, companies are likely to adopt a “wait-and-see” stance on capex and investment decisions, which would impact investment loan demand.
Any softening in loan volume growth would be negative for net interest income and net interest margins, especially given the fall in benchmark rates year to date.
On the non-interest income front, lower loan, trade, investment banking and possibly wealth fees are all potential dampeners, says RHB. However, this could be cushioned by opportunities from both customer flows, such as foreign exchange and interest rate hedging, and trading and investment activities.
“For now, we do not think the slower growth environment would have too significant an impact on asset quality and credit cost,” say RHB’s analysts.
Lower target prices
In addition to the downgrades for two of the three banks, RHB has slashed its target price on all three names.
OCBC and UOB, now at “neutral”, have target prices of $17.50 and $37.60, down from $19.10 and $41.60 at RHB’s March 7 note on the sector.
DBS, which remains at “buy”, now bears a target price of $47, down from $51.20.
“DBS is our sole ‘buy’ recommendation and preferred sector top pick,” says RHB. “We remain comfortable with the bank’s ability to stick with its dividend and capital return plans, which drives our FY2025 dividend yield of 7.5%. This is at a 490 basis points spread over the 10-year government bond yield and should help drive the stock’s relative outperformance.”
OCBC and UOB were last rated “neutral” on Nov 10, 2024; while DBS has been a “buy” in the eyes of RHB since Feb 7, 2024.
UOB will announce its financial results for 1QFY2025 ended March 31 on May 7, while OCBC will follow on May 9. DBS has yet to announce the date of its financial results.
As at 9.50am, DBS shares are trading 53 cents higher, or 1.28% up, at $41.95; while shares in OCBC are trading 23 cents higher, or 1.42% up, at $16.48; and UOB shares are trading 13 cents higher, or 0.37% up, at $35.43.
