Maybank Singapore’s Thilan Wickramasinghe warns that Singapore banks might disappoint when they report their trading update for 1QFY2022 ended March 31 on April 29.
Yet, if the share prices of DBS Group Holdings, Oversea-Chinese Banking Corp and United Overseas Bank dip as a result, it is actually a buying opportunity, writes Wickramasinghe in his April 14 note.
Wickramasinghe attributes the potential earnings disappointment to weak trading income and mark-to-market losses on investment securities, given the substantial macro-volatility during the quarter.
Wickramasinghe is basing his analysis on how JPMorgan recently reported a major loss of US$524 million in 1Q trading income from credit valuation adjustments and market volatility.
The Singapore banks, which generate around 8% of their earnings from trading, might see “downside-surprise risks from similar reasons to JPMorgan,” he reasons.
However, Wickramasinghe expects the Singapore banks to show resilience in their core business, with both loan growth and improving margins seen and extending into later this year.
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“From a timing perspective, a bulk of delivery could be skewed towards 2H22, as loan re-pricing gets reflected and customer investments accelerate from regional re-opening,” he adds.
Wickramasinghe expects the banks to maintain their loan growth guidance. He estimates the banks to grow their loan books for this year by 8.6% over the preceding FY2021, “given the underlying regional re-opening momentum and potential acceleration of North-South supply chain shifts.”
Wickramasinghe’s “top picks” from this sector are DBS and UOB, with a “buy” call on both these two counters.
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He likes them for their regional franchise, strong balance sheet and dividend visibility. His target price for DBS and UOB are $41.82 and $36.69 respectively.
As for OCBC, W’s call is for investors to “hold”, with a target price of $14.04.
The share prices of all three banks have come off their recent peaks seen last month.
DBS, OCBC and UOB closed last Thursday, April 14 at $33.48; $12.03; and $30.76 respectively.
