SINGAPORE (May 17): RHB Research has brushed aside fears that the shock victory at the Malaysian elections by an opposition coalition led by Mahathir Mohamad could pose a risk to Singapore banks.
“Some investors see the recent 14th General Election (GE14) in Malaysia contributing to more market volatility, although the equity market has been relatively stable after the elections,” says analyst Leng Seng Choon in a report on Wednesday. “We believe the risks to Singapore banks are low.”
According to the brokerage, Oversea-Chinese Banking Corp (OCBC) and United Overseas Bank (UOB) have close to 12% of their loans exposed to Malaysia, while DBS Group Holdings has negligible loans exposure to the country.
“The Malaysia exposure of Singaporean banks is also relatively small. Our view is that this exposure to our neighbour is not a negative for domestic banks,” says Leng.
See: DBS posts 21% rise in 1Q earnings to $1.51 bil
On the other hand, the analyst says widening net interest margins (NIMs) and loans growth remain on track to drive the banks forward. As such, RHB is keeping its “neutral” stance on the sector.
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“NIMs expansion remains a key catalyst to banks’ earnings growth,” says Leng. “We believe the 3-month SIBOR is on an upward trend, and this ought to help widen the banks’ NIMs.”
“Market expectations are for a few more hikes in the US federal funds rate (FFR) over the next 12 months. Based on data over the past 15 years, there is a clear positive correlation between the FFR and the 3-month SIBOR,” he adds.
Meanwhile, he says the banks are on target to hit high single-digit loans expansion in 2018, with 1Q18 loans expansion also on track.
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“The three banks recorded 1Q18 sequential loans growth of between 1.6-4.1%,” says Leng. “We are forecasting DBS and UOB to book 2018 loans growth of 8% each.”
See: OCBC reports 29% rise in 1Q to $1.1 bil on lower loan provisions and higher income from lending and wealth management
RHB’s top pick for the sector is UOB. The brokerage has a “buy” call on the bank, with a target price of $33.30.
“We like UOB, given its greater share of housing loans – which is likely to gain from optimism in the domestic residential property market – and high capital adequacy ratio (CAR) which provides scope for more dividends,” says Leng. “DBS’ valuation is relatively high, in comparison.”
UOB has the greatest percentage share exposure to housing loans, as well as the highest CAR among its peers.
According to Leng, some 27.6% of UOB’s loans are in the housing segment, compared to 26.4% for OCBC and 22.1% for DBS.
“Its CET1 CAR of 14.9% towers over its peers. As part of capital management, the management team has guided for more dividends going forward. This would also support UOB’s plans to raise its ROEs,” he says.
See: UOB reports 21% rise in 1Q earnings to record $978 mil as net interest income hits new high
As at 12.47pm, shares of UOB are trading 1 cent higher at $29.50, implying an estimated price-to-earnings ratio of 12.4 times, and a dividend yield of 3.9% for FY18.
