While CGS-CIMB Research analysts Andrea Choong and Lim Siew Khee have maintained their “overweight” rating on the Singapore banking sector due to positive consumer growth and the stabilisation of net interest margins (NIMs), Maybank Kim Eng analyst Thilan Wickramasinghe has maintained his “negative” rating on the sector.
Shares in all three Singapore banks, DBS, UOB and OCBC have re-rated 17% since end October due to the recovery in trade catalysed by news of successful Covid-19 trials.
However, the way Wickramasinghe sees it, the recent run up is not sustainable and amplified by liquidity.
“Uncertainty that existed in October still remain: non-performing loans (NPLs) are set to rise as moratoriums ease while borders remain closed, NIMs continue to be under pressure and dividend caps are unlikely to be lifted in 2021e,” he says
“Back in June, we saw a similar rally as regional lockdowns were eased. But this was short lived as the expected ‘V’ shape recovery did not materialize,” he adds.
To this end, Wickramasinghe has downgraded DBS, OCBC and UOB to “sell” with no change in their target prices of $24.63, $9.29 and $21.24 respectively.
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He has also advised investors “take profit” from the growth in the share prices of banks during this period of growth.
“The banks are currently trading near the ceiling of the peak-to-trough channel established this year. The y-t-d trough-peak-trough movements have on average lasted four weeks. The sector is trading at 10.6x 12- month price-to-earnings (PE), which is 8% shy of its long term mean,” he says.
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Instead, he “prefers” SGX as his pick as he believes the counter should “benefit from market volatility as well as structural trends”.
On this, Wickramasinghe views the sector’s expectations as overruling reality.
The banks, which released its results for the 3QFY2020 recently, largely maintained their bearish credit charge guidance.
Wickramasinghe says while he expects overall sector allowances to fall 46% y-o-y in 2021e, this is “off a high base”.
“In absolute terms it is still 13% higher than 2017 – the height of the O&M crisis. Loan moratoriums regionally are keeping NPL visibility low. The repayment experience following the lifting of Malaysian moratoriums in 3QFY2020 have been benign, but this is too short a track-record,” he notes.
He adds that successful vaccine trials may have raised hopes for a rapid economic recovery, the effective rollout and reaching herd immunity may be possible towards the end of 2021.
“GDP expectations in Singapore looks set to grow 4.5% following a -5.5% contraction in 2020e. This is not sufficient to go back to 2019 levels,” he says.
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He has thus estimated NPLs to rise to 2.1% next year, the highest since the global financial crisis (GFC) in 2007 and 2008.
Wickramasinghe also views that the banks’ dividend visibility will remain muted.
The sector currently capping its dividends to 60% of 2019 levels, which he believes, is done largely to preserve capital and system liquidity amidst uncertainity.
“We estimate 2021E sector CET1 ratios to fall to 13.9% driven by rising NPLs vs. 14.1% in 2020e. 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,” he says.
“Clarity on this is unlikely to come before end 1H2021, 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.
On the other hand, CGS-CIMB’s Choong and Lim have maintained their “add” calls on DBS, OCBC and UOB with target prices of $28.35, $12.52 and $27.72 respectively.
System loans may have contracted 0.3% m-o-m in October 2020 due to muted business sentiments, but they see a pick-up in retail growth during the same period.
The banks have also registered healthy deposit growth driven by current account savings account (CASA) from Singapore residents.
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“Most of the October growth was contributed by residents in Singapore (+$8.6 billion), while inflows from residents outside the city state accounted for a smaller +$543 million,” they note.
“Correspondingly, the deposit growth was mainly denominated in Singapore dollars (+$8.1 million). Barring the uptick of FCY-denominated deposits in Oct 20 (+$3.1 billion), growth momentum of this class of deposits slowed to +$7 billion in February to October, compared to a significant +$14.5 billion over June 2019 - January 2020, as geopolitical pressures eased, in our view.”
Choong and Lim also view the bottoming of the benchmark rates as reinforcing the stabilisation of NIMs.
“3MSIBOR/SOR/LIBOR settled at an average 0.40%/0.18%/0.22% in October - November 2020, easing just 3 basis points (bp)/1bp/3bp from the average in 3Q2020. The stark moderation in compression (vs. the c.23-34bp decline in 3Q20 and c.83-93bp decline in 2Q20) is a reinforced indication of a stabilisation in Singapore banks’ NIMs going into FY2021F,” they say.
“Although some tailwind effects of the benchmark rate compression on asset yields in 4Q20F may be expected, we believe that funding cost savings will offset this.”
“However, we stay cognisant on the impact of the strong liquidity inflows on bank leverage (as system LDR reduced to 92.5% from 100% in Mar 20) offsetting the effects of funding costs savings on NIMs,” they add.
Shares in DBS, OCBC and UOB closed at $25.32, $10.05 and $22.75 on Dec 2 respectively.
