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CGS-CIMB Research analysts Andrea Choong and Lim Siew Khee have kept “overweight” on the Singapore banking sector, with “add” calls for all three banks, DBS Group Holdings, Oversea-Chinese Banking Corporation (OCBC) and United Overseas Bank (UOB).
Choong and Lim have given target prices of $32.64, $13.75 and $28.84 on DBS, OCBC and UOB respectively.
In their May 19 report, Choong and Lim say they see the banks weathering through the uncertainties, with FY2021 net profit on a trajectory to recovering to pre-Covid-19 levels.
That said, the tighter movement restrictions, if prolonged, pose key risks to economic recovery, in their view.
“We are cognisant that Covid-19 curbing measures may slow down economic recovery progress, but we think that key revenue drivers of wealth and treasury income, which are partly dependent on financial market performance, and liquidity deployment will still sustain net profit growth back to pre-Covid-19 levels,” they explain.
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Choong and Lim say that the banks’ credit costs could rise q-o-q amid vastly lower costs in the 1QFY2021, but are likely to remain within guidance.
“For context, loans under moratorium have reduced to [around] 1-6% of group loans in 1QFY2021, compared to 10-15% at its peak in 2QFY2020. In tandem, impairment provisions totalled 24-29 basis points (bp) for OCBC and UOB, and just 1bp for DBS in 1QFY2021 given its model-driven impairment writeback,” they write.
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“We understand that Singapore banks seek further asset quality stabilisation, particularly for exposures under extended relief, and a more reassuring pace of economic recovery before considering any writebacks of management overlay,” they add.
On this, Choong and Lim believe that Singapore banks are likely to take on a “more conservative” stance with slightly higher general provisions in the 2QFY2021 given the recent movement restrictions, although full-year impairments will remain within the banks’ guidance.
SEE:Analysts remain 'overweight' on Singapore banking sector after record 1Q, OCBC and DBS top picks
To the analysts, UOB is their preferred sector pick due to a more stable earnings trend coming off record treasury market income across the sector. This is then followed by DBS, then OCBC.
“Trading at 1.0 times FY2021 price-to-book value (P/BV), UOB may close the valuation gap against peers as Covid-19 infections in regional economies start easing, raising the pace of business transactions as the economies reopen,” they say.
Shares in DBS, OCBC and UOB closed at $29.83, $11.93 and $25.62 on May 21.
