SINGAPORE (Oct 11): Jefferies is reiterating its modestly bullish stance on Singapore within the global asset allocation.
The three local banks – DBS, UOB and OCBC – contribute about 40% weight of local market index.
The Singapore central bank chief has an upbeat outlook on the economy, though being cautious about slump in investment, if global sentiment are negatively impacted.
The Monetary Authority of Singapore (MAS) is due to announce its policy statement on Friday.
In a Wednesday report, equity analyst Krishna Guha says, “Further appreciation of policy stance is likely to reinforce Singapore as a regional financial centre/WM hub, which should be positive for Singapore banks.”
As at Aug, system (Domestic Banking Unit (DBU)+ accounting unit (ACU)) loans have increased by 8.7% y-o-y, compared to last three months’ average growth of 9.6%. The analyst believes that this is a moderation, rather than a collapse.
Meanwhile, mortgage grew 3.5%, compared to the 1H average of 4.5% before the cooling measures kicked in.
On the other hand, interbank rates have moved up 11 bps from 2Q.
“Gap between LIBOR and SIBOR is growing, which should put upward pressure on SIBOR but that may also be reflecting market's expectation of further appreciation of MAS SGD nominal effective exchange rate,” says Guha.
The yield curve has also started to steepen, which should help gapping income for banks. But Guha reckons that overall non-interest income is likely to be under pressure, due to declines in equity markets and its impact on levered positions, if any.
The research house has “buy” calls on DBS, UOB and OCBC. All three banks have embraces digital initiatives, which should lead to improved efficiency and additional growth opportunities in footprint economies.
As of 2Q, all three banks have CET-1 in excess of 13%. DBS and UOB has grown total capital by 2.6% and 0.6% respectively, despite growing dividend.
“We estimate the impact of optimal capital structure, lower CIR and a more normal interest rate on bank profitability,” says Guha.
He assumes 13% CET 1 ratio, 40% CIR and 5 basis points increase in margins from levels achieved in 1H. According to his estimates, the banks will gain up to 2.5 percentage points in RoR, with UOB being the highest gainer due to its excess capital position. And as credit cost declines and if there are any O&G-related recoveries, profitability may touch mid-teens.
“Current valuations are -1 SD on PE (10 times) or at mean SD on PB (1.25 times) on an historical basis. One may argue that banks are fairly valued on PB, but we think it may be ignoring the potential of higher RoE,” says Guha.
As at 1.00pm, shares in DBS, OCBC and UOB are trading at $24.23, $10.62 and $25.12, respectively.
