SINGAPORE (June 3): CGS-CIMB Research is keeping United Overseas Bank (UOB) as its top pick among the Singapore banks, despite the bank’s NIM expansion underperforming compared to its peers.
According to lead analyst Andrea Choong, UOB’s valuations are inexpensive at 1.0 times FY19F price-to-book value (P/BV) – close to 1 standard deviation below its long-term mean. The bank also offers a FY19F dividend yield of 5.1%.
“UOB’s 1Q19 loan growth was the strongest amongst peers at +3.0% q-o-q. However, NIM expansion has underperformed its peers, having contracted for four consecutive quarters,” she adds.
CGS-CIMB has an “add” recommendation on UOB with a target price of $29.58.
As at 11.50am, shares in UOB are trading 5 cents up at $23.55.
Meanwhile, the brokerage has “hold” calls on DBS Group Holdings and Oversea-Chinese Banking Corporation (OCBC), with target prices at $27.64 and $12.59, respectively.
As at 11.50am, DBS is trading down 21 cents at $24.09 and OCBC is trading up 4 cents at $10.61.
“[DBS’s] loan growth came in at just 0.6% in 1Q19, but the bank maintains its mid-single-digit guidance for FY19. NIM expanded steadily by 1bp in 1Q19 – on track to meet our 5bp expectations,” says Choong.
“Despite the weak 0.3% q-o-q loan growth showing in 1Q19, OCBC recorded the strongest NIM expansion amongst peers. More repricing effects could spill over into 2Q19, thus boosting margins,” she adds.
The brokerage is also maintaining its “neutral” call on the Singapore banks sector, given more moderate loan growth prospects and NIM expansion in FY19.
“Sector valuations continue to trend below the 15-year mean of 1.3x CY19F P/BV but upside could be capped by trade war volatilities,” Choong says.
She notes that banking system loan growth was broadly stable at +4.0% y-o-y in April, and expects system loans to moderate and expand by close to 4.5% in FY19.
This is lower than the 5.3% growth in FY18, in tandem with the brokerage’s lower GDP growth expectations.
However, domestic mortgages, which contracted for the third consecutive month in April, could receive a boost from HDB upgraders.
“We think that the declining trend could reverse in coming months from a leap in the number of public housing units with 5-year minimum occupancy periods ending in FY19,” Choong says.
According to the analyst, close to 30,000 HDB units will hit their minimum occupancy periods this year, compared to an average of 7,000 units in FY15-18.
“With the downtrend in USD rates, the pace of increase of average 3-month SIBOR has also slowed in FY19, rising just 4bp to 1.96% in 2Q19. Nevertheless, we are hopeful that this may sustain NIMs in 2H19 as mortgage repricing effects run off. We expect NIMs across Singapore banks to expand by up to 5bp in FY19,” Choong says.
