SINGAPORE (Jan 5): UOB Kay Hian is maintaining its “overweight” rating on Singapore’s banking sector and DBS and Oversea Chinese Banking Corporation (OCBC) as its top “buy” picks – with higher target prices of $29.50 and $14.88, respectively, from $26.10 and $13.56 previously.
In a Friday report, analyst Jonathan Koh highlights DBS’ reputation as “the world’s best digital bank” along with its productive workforce, as well as OCBC for its leading cost efficiency, along with its income and pre-provision operating profit (PPoP) per employee which have grown at a faster CAGR of 4.6% and 4.3% respectively for 2013-2017 as compared to its peers.
In particular, Koh sees artificial intelligence (AI) or big data, cryptography, and mobile access as enablers of the financial technology (fintech) industry going forward – allowing banks to reach and serve a wider audience with a leaner cost structure.
This is particularly so for OCBC, which has experimented using AI to handle home loan enquiries, wealth management advisory and regulatory compliance, says the analyst.
“OCBC leads in cost efficiency with the lowest staff cost per employee at $83,333. Its other non-wage expenses are also very lean… OCBC had a lean cost-to-income ratio of 42.3% as of 9M17,” notes Koh.
Although he is cognisant that distributed technology (DLT) may cause some disruption in the fintech industry, he sees the impact as manageable as cryptocurrencies, which are built on DLT, currently do not affect central banks’ ability to conduct monetary policy.
Meanwhile, the analyst also highlights DBS’ lean cost-to-income ratio of 43.5% as of 9M17 along with its reputation as the world’s best digital bank, especially given its recent launch of the mobile-only Digibank service in India and Indonesia.
“DBS leads in productivity with the highest income per employee at $538,805 and pre-provision operating profit (PPoP) per employee at $313,701, due to its focus on developed markets in Singapore and Hong Kong. It generated income of $4.20 and PPoP of $2.39 for every $1.00 invested in staff costs,” observes Koh.
Overall, he postulates that the normalisation of the size of central banks’ balance sheet decline could lead to the normalisation of valuations for banks upward, and again underscores his preference for OCBC based on valuation grounds.
While maintaining its earnings forecasts for both stocks, UOB Kay Hian says key sector catalysts would include rising interest rates and bond yields as well as the easing of pressure on asset quality from the oil and gas (O&G) sector – with the rapid increase in Fed rate hikes, which would in turn trigger capital outflows from countries in Southeast Asia, as a key risk.
As at 3.50pm, shares in OCBC and DBS are trading at $12.89 and $26.26, or 12.6 times and 13 times FY18F P/E, respectively.
