SINGAPORE (Jan 9): Deutsche Bank Markets Research says the increasing strength from Singapore banks’ private and consumer banking businesses is giving them the edge over other US dollar-leveraged markets such as Hong Kong.
“Between Hong Kong and Singapore – both considered to be private banking centres of Asia – [Singapore] domestic banks were seen as early movers in this space, with early success,” says Deutsche Bank lead analyst Franco Lam in a Monday report.
“The expected continued strength from this segment should be viewed as a positive catalyst for [Singapore] banks structurally in the longer run,” he adds. “More importantly, we believe that [Singapore] banks deserve to get recognised and to trade at a higher multiple for their retail/wealth management (WM) capabilities, which we believe the sector as a whole is currently mispriced in the market.”
Lam opines that Singapore banks continue to look “relatively attractive”, despite currently trading at a price-to-book ratio of 1.4 times, which is above the sector’s 10-year average.
In this light, Deutsche Bank is upgrading United Overseas Bank (UOB), which it considers the most undervalued among the three local banks, to “buy” with a 20% higher target price of $30.60, from “hold” previously.
“We see UOB as a huge laggard with an underappreciated retail banking franchise in [Singapore],” says Lam.
According to Lam, UOB is trading at a significant discount to its Singapore peers with a price-to-book ratio of 1.1 times and an estimated return on equity (ROE) of 10.4% for FY2018.
As at 2.40pm, shares of UOB are trading 53 cents higher at $27.78.
On the other hand, Deutsche Bank is downgrading Hong Kong’s Hang Seng Bank (HSB) to “sell” with a higher target price of HK$169, from “hold” with a target price of HK$158 previously.
While Lam notes that HSB has always been recognised as one of the strongest retail banks in the region within the Hong Kong versus Singapore banks context, the analyst believes that HSB will incrementally find it more difficult to maintain this strong dominant position.
“HSB looks extremely overvalued versus peers even factoring in higher multiples under business mix,” Lam says.
“Aside from expensive valuations, HSB’s operating fundamentals are not supportive of such a high valuation – it has the weakest provision coverage buffer, lowest risk weight density and lowest GP buffer – we believe the IFRS9 impact and negative headwinds from higher rates will be more negative for the asset quality cycle for the bank than the rest,” he adds.
As at 2.40pm, shares of HSB are trading 90 HK cents lower at HK$191.20, implying an estimated price-to-earnings ratio of 18.7 times, a price-to-book ratio of 2.5 times, and a dividend yield of 3.7% for FY2018.
“Both Hong Kong and Singapore markets should remain the key private banking centres of Asia in the long run as the banks will benefit from rising wealth from both the onshore and offshore markets, which should improve retail banking profitability in the long run,” says Lam.
However, Singapore banks are looking more attractive at the moment as they tend to benefit the most after adjusting the misalignment in target prices, he adds.
