PhillipCapital analyst Tay Wee Kuang has maintained his “neutral” recommendation on the Singapore banking sector as he does not foresee the banks’ earnings to reach pre-Covid-19 levels in the near term.
See also: Analysts remain 'neutral' on Singapore banking sector following extension of loan relief measures
This is due to the “strong headwinds” arising from low interest rates and heightened allowances, despite the “expected recovery in non-interest income” upon the reopening of Singapore’s economy, he says.
Interest rates in the banking sector for 3Q2020 registered the lowest figures since 2014. The three-month Singapore Interbank Offered Rate (SIBOR) and three-month Swap Offer Rate (SOR), at 44 basis points (bps) and 94 bps respectively, came in lower than the average in 1H2020.
As such, Tay expects banks to report net interest margin (NIM) levels that are similar or slightly lower than in 2Q2020 “as continued downward pressure on interest rates offsets benefits from repricing of deposit rates”.
Loans in the sector contracted 1.03% y-o-y in August as outstanding loans shrank for the sixth consecutive month.
“The poor loans performance was attributed to business loans, which fell -0.04% y-o-y for the first time since November 2016 in August. Consumer loans fell 2.61% y-o-y, but improved by 0.33% m-o-m, as all loans segment apart from housing loans (car loans, credit card loans, share financing and others) improve in August from a month ago,” says Tay.
However, there is an upside to the sector arising from the “strong support measures” provided by the Singapore government.
On Oct 5, the Monetary Authority of Singapore (MAS) says it will be providing additional support for individuals and small and medium-sized enterprises (SMEs) who require assistance in loan repayments.
“This will partially ease cashflow challenges faced by borrowers while allowing the banks and other FIs to resume loan collections that can prevent cliff effect from a sudden deterioration in loan quality resulting from borrowers who are unable to resume full payments at the onset of the loan moratorium expiry,” he notes.
As at 2Q2020, the three banks have a total of some $100 billion of loans under moratorium, with DBS having the least exposure at 4.8% compared to OCBC’s 10.1% and UOB’s 15.1%.
The latter have higher portion of loans under moratorium due to their higher exposure in Malaysia, where, Tay says, loan moratoriums are automatically granted for loans in the country.
“We expect loans under moratorium to taper in 4Q2020 as Malaysia has exited loan moratorium period in September,” he says.
To that end, Tay has downgraded his recommendation on DBS to “neutral” with a target price of $21. He has also maintained his “accumulate” call on OCBC and UOB with target prices of $8.92 and $20.40 respectively.
“A potential re-rating catalyst will be a better-than-expected credit profile of borrowers post-moratorium in Singapore, which can spell an earlier end to the heightened credit costs which the banks have guided for to the end of FY2021,” he says.
UOB Kay Hian analyst Jonathan Koh, on the other hand, has maintained his “overweight” call on the sector as they possess an “optimal mix of less moratorium loans but high loan loss coverage”.
See also: UOBKH kick starts appetite on ST Group
“Moratoriums are largely granted to secured loans, such as SME loans and residential mortgages, which account for more than 90% of moratorium loans. Outstanding balances for moratorium loans should start to taper off once moratorium expires in Sep 20 for Malaysia and Dec 20 for Singapore. UOB expects 10-15% of moratorium loans to become non-performing loans (NPLs),” he says.
Koh is also positive on the sector as UOB’s global economics and market research team forecasts that GDP growth for the Singapore economy would turn around to positive growth of 0.1% y-o-y in 1Q2021 and accelerate to 12% y-o-y in 2Q2021, he says.
Similarly, the team believes that the unemployment rate is expected to peak at 3.5% in 4Q2020 and subsequently taper off in 2021.
“For Singapore banks, NPL formation is expected to accelerate in 1H2021 after moratoriums are withdrawn. However, provisions are front-end loaded in 2020 due to FRS 109 and banks should see lower provisions in 2021,” says Koh.
Koh adds that a working Covid-19 vaccine may be authorised for emergency use by November or December 2020 and formal approval for general public use in 1Q2021, which would lead to improved business confidence, a reduction in stress on the corporate sector, thus moderating NPL formation.
He has thus maintained “buy” calls on DBS and OCBC with target prices of $23.50 and $11.48 each.
As at 4.30pm, shares in DBS, OCBC, and UOB are trading 1.62% up, 1.28% up and 1.23% up, at $21.39, $8.70 and $19.70 respectively.
