Next year though, the SIBOR rally should kick in, leading to NIM acceleration. Meanwhile, upsets in the oil & gas sector were dealt with in 3Q17, which should ease credit costs. Finally, loan growth has picked up and should sustain on a positive GDP outlook forecast at 3%.
DBS is forecasting three Fed rate hikes in 2018 and assuming pass-through to SIBOR/SOR will normalise, this will lead to an NIM forecast uplift by 5bps for 2018 taking into account some competition and rise in funding costs. Every 25-bp rise in interest rates that reprices the S$, HK$ and US$ book collectively will lift average NIM by 3bps with a corresponding 2% increase in sector earnings, according to Lim.
With NPL woes largely addressed in 3Q17, the banks should make a clean start in 2018 and credit costs should ease. Lim expects credit cost to drop by 6bps to 29bps. As banks are working on how to treat excess general provision reserves for IFRS9/SFRS109, DBS will relook its credit cost assumption, given every 5bps decrease in credit cost will lift average sector earnings by 3%.
“All these factors should drive valuations up further but we believe the banks’ ability to keep a clean asset quality trend would be the most crucial factor to shift valuations above mean,” says Lim.
See also: Jefferies reiterate DBS as their preferred bank given lowest NIM margin sensitivity, TP $52
DBS has ‘buy’ for both OCBC and UOB with target prices of $13.50 and $27.50 respectively.
As at 11.43am, shares in OCBC are trading 3 cents lower at $11.98 or 10.7 times FY18 earnings while shares in UOB are trading 11 cents higher at $25.88 or 10.9 times FY18 earnings.
