DBS Bank and OCBC Bank are RHB Group Research’s top picks among Singapore’s three banks as they expect growth in residential mortgages to stay firm amid rising interest rates.
“Last week’s move by local banks to pull fixed-rate residential mortgages off their shelves suggests that the US Federal Reserve’s revised terminal rate of 4.6% in 2023 is generally higher than expected,” writes the Singapore research team at RHB Group Research.
In a Sept 29 note, the team of analysts are maintaining “overweight” on the Singapore banking sector. They have “buy” calls out for DBS and OCBC, with target prices of $37.60 and $13.90 respectively. Meanwhile, RHB is “neutral” on United Overseas Bank (UOB) with a target price of $29.30.
Late last week, UOB and DBS announced that they will be suspending fixed-rate home loans as they review the interest rates on these packages.
This follows the 75 bps hike in the Federal Funds Rate (FFR) to 3.25% on Sept 21. The banks’ decision to review the fixed-rate loans can be attributed to the US Fed’s hawkish signalling for more aggressive than expected hikes ahead, say RHB analysts.
US officials forecast rates would reach 4.4% by the end of 2022 and 4.6% in 2023, sharply higher than June’s projections of 3.25% and 3.50% respectively.
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RHB expects some temporary softening in property sales, though underlying demand remains firm. “We believe home buyers would adjust to the higher interest rate environment and this should eventually lead to a rebound in sales of residential properties, in particular the mass market residential properties.”
RHB analysts point to the 31% q-o-q increase in the number of private residential units sold in 2Q2022, compared to the sharp 39.5% q-o-q fall in 1Q2022 following the announcement of property cooling measures in mid-December 2021.
The Urban Redevelopment Authority (URA) reported a healthy 3.5% q-o-q rise in residential property prices in 2Q2022, extending the rise in prices of private residential property to nine consecutive quarters, add the analysts.
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Banking system property loans grew 2.3% year-to-date (ytd) July 2022, or 4.0% annualised. “This compares favourably against the flattish consumer loans and 1.3% ytd increase in business loans over the same period. We believe banks would chalk moderate, but sustained, increase in residential mortgages over the next 12 months helped by the drawdown of loans for sales booked in 2021. As at end-June 2022, housing loans accounted for 18% of DBS’s gross loans, 21% of OCBC’s, and 23% of UOB’s,” says RHB.
Following the US Fed’s hawkish stance in September, the RHB team expects the banks’ net interest margin (NIM) expansion to expand by a bigger quantum earlier than expected. This would bode well for the banks’ net interest income (NII).
As at 11.26am, shares in DBS are trading 53 cents higher, or 1.63% up, at $33.09; while shares in OCBC are trading 16 cents higher, or 1.37% up, at $11.87; and shares in UOB are trading 36 cents higher, or 1.37% up, at $26.52.
