UOB Kay Hian analyst Jonathan Koh has kept his “overweight” rating on the Singapore banking sector ahead of the banks’ results for the 4QFY2024 ended Dec 31, 2024.
In his Jan 17 report, Koh believes that the trend of elevated government bond yields is expected to continue in the near term on the back of growth in the US economy from growth in consumer spending on services, exports, business investments and government spending.
Koh is also positive on the sector due to growth expected in the Asean economies driven by foreign direct investment (FDI) inflows. The banks’ asset qualities remain “pristine”, he adds.
In addition, banks provide “attractive” value with a low P/B of 1.46 times and a high dividend yield of 5.9% for 2025.
DBS Group Holdings will report its results on Feb 10, while United Overseas Bank (UOB) and Oversea-Chinese Banking Corporation (OCBC) will announce their results on Feb 19 and 26 respectively.
‘Buy’ DBS; higher dividends expected
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In 4QFY2024, the analyst forecasts DBS’s net profit to grow by 12% y-o-y but decline by 16% q-o-q to $2.54 billion. During the quarter, Koh believes DBS will benefit from “steady loan growth” supported by the stronger US dollar (USD) and Hong Kong dollar (HKD) while its wealth management segment is expected to grow by 54% y-o-y but decline by 6% q-o-q on positive sentiment but interrupted by “seasonal softness”.
DBS’s net interest margin (NIM) is also expected to be stable at 2.11% in 4QFY2024 with NIM compression delayed to 1QFY2025 due to the 100 basis points (bps) of interest rate cuts by the US Federal Reserve in September to December 2024. Koh forecasts the bank’s net interest income (NII) to grow by 4.3% y-o-y in 4QFY2024.
Meanwhile, DBS’s operating expenses are tipped to decrease by 1% y-o-y without the bank’s $100 million contribution to corporate social responsibilities incurred last year. In 4QFY2024, the bank’s cost-to-income ratio (CIR) is likely to be seasonally higher at 43.5% and 40% for the full year, which is in line with management’s guidance of low-40% for FY2024.
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DBS’s non-performing loans (NPL) formation is also expected to remain benign with NPL remaining stable at 1%.
“DBS has accumulated ample management overlay for general provisions of $2.3 billion. We expect DBS to incur total provisions of $172 million and credit cost of 16 bps in 4QFY2024 (FY2024: 12 bps),” Koh writes.
In the 4QFY2024, the analyst expects DBS to increase its quarterly dividend by 6 cents, or 11.11% higher, to 60 cents. He also expects the bank to return excess capital to its shareholders via a special dividend of 50 cents per share.
Koh has a “buy” call on DBS with a target price of $46.50. DBS is also the analyst’s top pick for its focus and emphasis on capital management.
‘Buy’ OCBC for its trade and investment flows in Asean and ‘defensively low’ FY2025 P/B
Koh also has a “buy” call on OCBC with a target price of $20.80 as he likes the bank’s focus on trade and investment flows within Asean and its “defensively low” P/B of 1.30 times for FY2025.
OCBC’s 4QFY2024 net profit is expected to grow by 8% y-o-y but drop by 11% q-o-q to $1.75 billion. While the bank’s loans are expected to expand by 2.4% y-o-y and 0.5% q-o-q, Koh believes the depreciation of the Malaysian ringgit (MYR) against the Singapore dollar (SGD) might exert some pressure on loan growth.
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With this in mind, the analyst is forecasting OCBC’s NIM to ease by 13 bps y-o-y and 2 bps q-o-q to 2.16%. Net interest income (NII) is tipped to drop by 1.1% y-o-y in 4QFY2024.
In fees, Koh expects OCBC’s fee income to grow by 7% y-o-y to $492 million, while the bank’s wealth management segment is likely to fall by 6% q-o-q but increase by 18% y-o-y on seasonal softness. Loans and trade-related fees are expected to grow by 2% y-o-y to $135 million.
In addition, OCBC is likely to report stable contributions from its insurance arm following the adoption of SFRS(I) 17, which moved mark-to-market for insurance assets and liabilities to fair value through other comprehensive income. SFRS refers to Singapore Financial Reporting Standards (International). OCBC’s contribution from its insurance business is likely to be normalised at $275 million in 4QFY2024.
Like DBS, OCBC’s NPL ratio is expected to remain stable at 0.9%.
“We have factored in total provisions of $170 million and credit costs of 22 bps in 4QFY2024, which is in line with management’s guidance of 20 bps for 2024,” Koh writes.
Like DBS, OCBC is also expected to increase its final dividend by 9.5% y-o-y to 46 cents for the 2HFY2024 with an estimated payout ratio of 53.7% for FY2024. OCBC had the highest fully phased-in common equity tier 1 (CET-1) capital adequacy ratio (CAR) of 15.6% and lowest NPL ratio of 0.9% as of June 2024.
As at 11.28am, shares in DBS are trading 12 cents lower or 0.27% down at $43.73 while shares in OCBC are trading 2 cents higher or 0.12% up at $17.14.
