While recovery hopes abound for Singapore banks following 3QFY2020 results earlier this month, Maybank Kim Eng analyst Thilan Wickramasinghe thinks the recent run up is “unsustainable”, and banks are moving “too fast, too furious”.
He is maintaining his “negative” call on the sector, downgrading DBS from “buy” to “sell”, with an unchanged target price of $24.63, along with downgrading OCBC and UOB from “hold” to “sell”, with unchanged target prices $9.29 and $21.24.
Instead, Maybank prefers SGX, recommending “buy” with a target price of $10.77.
“The banks are currently trading near the ceiling of the peak-to-trough channel established this year. We do not see any compelling near term catalysts that can support a break out through these ceilings,” writes Wickramasinghe in a Nov 24 note.
He points to the 17% re-rating of banks here since end-October. “They have benefitted from the recovery trade catalysed by newsflow of successful Covid-19 vaccine trials. We believe this is overdone and amplified by liquidity.”
Uncertainty that existed in October still remains, he says. Non-performing loans (NPLs) are set to rise as moratoriums ease while borders remain closed, net interest margins (NIMs) continue to be under pressure and dividend caps are unlikely to be lifted in 2021E.
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Wickramasinghe notes that a similar rally was seen back in June, as regional lockdowns were eased. “But this was short-lived as the expected ‘V’ shape recovery did not materialise,” he adds.
In addition, the sector is under a cap of 60% 2019 dividends, recommended by the Monetary Authority of Singapore. “We believe this was done largely to preserve capital and system liquidity amidst uncertainty. We estimate 2021E sector common equity tier-1 (CET1) ratios to fall to 13.9% driven by rising NPLs vs. 14.1% in 2020E,” he says.
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“As a result, we believe there is a high chance of MAS rolling forward dividend caps to 2021E given capital ratios should be weaker than when they first imposed the cap. Clarity on this is unlikely to come before end-1HFY2021, we believe. The sector is yielding 3.2% in 2021E vs. 6% for large cap REITs, making it un-compelling as a dividend play at this time,” he adds.
Meanwhile, DBS Group Research analyst Lim Rui Wen remains optimistic on the banks as proxies to a broader economic recovery. In a Nov 26 note, Lim maintains “buy” on both UOB and OCBC, with target prices $24.80 and $11.00.
“We believe that the market has largely priced in known negatives, including concerns on asset quality and lower net interest income. Singapore banks are largely viewed as proxies to the broader economic recovery as we are expecting long-end yields to tick up as we see US Treasury (UST) yield curve steepening in the medium term,” says Lim.
Lim expects sector earnings to grow by 21% y-o-y in FY2021F. “We expect sector earnings to improve by 21% y-o-y in FY2021F, driven primarily by lower provisions as total income is likely to face some pressures from lower interest rates, amid recovering non-interest income.”
“Operating expenses may come in lower than our expectations as Singapore banks embark on cost cutting initiatives, including occupancy cost. We continue to keep watch on expiry of loan moratoriums in Singapore at year-end, as well as expiry of loan moratorium extensions by 1HFY2021F,” adds Lim.
As at 2.02pm, shares in DBS are trading 24 cents lower, or 0.94% down, at $25.44; while shares in OCBC are trading at 13 cents lower, or 1.28% down, at $10.00; and shares in UOB are trading 24 cents lower, or 1.03% down, at $23.00.
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