JPMorgan is forecasting that Singapore bank share prices will fall later in 2023, due to a risk of non performing loans (NPL).
A team of five analysts from the financial services company say that Singapore banks are a harbinger of asset quality issues for the region, and they think that this sector should “range-trade” on valuations and dividends, before NPLs lead to a drop in stock prices.
According to Fidelity, range trading is an active investing strategy that identifies a range at which the investor buys and sells over a short period.
They hand “neutral” ratings on DBS and OCBC, and are most optimistic about UOB, which they have given an “overweight” rating.
In their Jan 2 report, the analysts explain that for UOB, its valuations and the $3.6 million Citi deal offers upside on revisions and re-rating.
However, they note that in the very near term, UOB’s share price has outperformed DBS and OCBC. UOB is up 13% since the announcement of its 3QFY2022 results (ended 30 Sep, 2022) on 28 Oct, 2022, compared to 2% for DBS and 0% for OCBC.
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As such, they think that UOB may give up some relative performance in its 4QFY2022 results ended Dec 31, 2022.
For DBS, the analysts think that DBS looks “interesting” below $33 and is forecasted to peak at $37.
At a share price of $33, JPMorgan says DBS will stand at it is at an FY2023 P/B ratio of 1.36, as well as a 7% dividend yield for FY2023 and 9% dividend yield for FY2024, and at $37 will represent a FY2023 P/B ratio of 1.52.
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For OCBC, they note that the stock is at one of the cheapest levels in the last 15 years, at 7.8x FY2023 P/E, which limits downside.
However, the JPMorgan analysts note a merger and acquisition risk for OCBC, and reiterate their concerns that the bank has accumulated capital in the last few years, with limited clarity on capital use, which has led to worries on value-eroding deals.
In a separate report, the analysts say that while DBS and UOB closed multiple deals in the last two years, such as the merger of Lakshmi Vilas Bank into DBS India in November 2020, and UOB’s $3.6 billion acquisition of Citi’s Asean assets. On the other hand, OCBC did not have any such deals.
They say that the specifics, size and timing of a deal is unclear; which coupled with $4 billion to $5 billion of excess capital keeps risks elevated for OCBC.
As such, they say that “we recommend adding positions post the deal, if the size is big enough, and we expect a trading range of $11.50 to $13 for the stock.”
Figure 1: Singapore banks’ dividend yield
Infographic: JP Morgan
