SINGAPORE (Aug 10): UOB Kay Hian is maintaining “overweight” on Singapore’s banking sector with DBS and Oversea-Chinese Banking Corporation (OCBC) as its top “buy” picks with target price estimates of $24.85 and $13.38 respectively.
In a Monday report, analyst Jonathan Koh notes that while OCBC and United Overseas Bank’s (UOB) 2Q17 beat the research house’s expectations, DBS’ results came in line.
Based on his observations, all three banks generally saw healthy growth in contributions from fee income as well as contributions from credit cards over the quarter.
“Business sentiment has improved, which raises the prospects of a sustainable pick-up in economic growth in regional countries. Higher interest rates and bond yields are also positive for banks. Headwinds from the oil and gas (O&G) sector have diminished as banks have recognised lumpy vulnerable accounts within the offshore support services segment as non-performing loans (NPLs),” says Koh.
The analyst nonetheless likes DBS as it performed the best among the three banks in terms of cost containment over the latest quarter, with operating expenses declining just 1% on-year in comparison to OCBC and UOB’s respective increases of 6% and 7% – which signals that DBS has benefitting from its investments in digitisation.
Aside from having the highest common equity tier 1 (CET1) capital adequacy ratio (CAR) of 14% compared to UOB’s 13.3% and OCBC’s 12%, the bank recently completed its review of its dividend policy and has increased its 2017 interim dividend to 33 cents per share from 30 cents previously.
OCBC, on the other hand, benefitted over the quarter from a doubling in contributions from life insurance, as well as a recovery in fund management where contributions increased 12% on-year.
Aside from stabilising asset quality as the only bank among the three with an unchanged NPL ratio, OCBC has also displayed the lowest cost-to-income ratio of 41.4% compared to DBS and UOB’s respective ratios of 43.4% and 45.6%.
“DBS and OCBC trade at 2017F P/B of 1.19x and 1.25x, which is below their long-term mean. This provides price upside of 12% and 32% respectively if they trade towards their long-term mean P/B of 1.33x and 1.65x. They also provide decent dividend yields of 3.1% and 3.2% respectively,” concludes the analyst.
As at 10.04am, shares in DBS, OCBC and UOB are trading at $21.26, $11.33 and $24.45, respectively.
