SINGAPORE (July 16): RHB Research is upgrading Singapore’s banking sector to “overweight” from “neutral” on expected widening NIM (net interest margin) despite the property cooling measures.
Assuming further hikes in the US federal funds rate (FFR) and the Sibor (Singapore Interbank Offered Rate), RHB is forecasting DBS and UOB to record an FY20 average NIM of 1.96%, This is sharply higher than the two banks’ 1Q18 average NIM of 1.84%.
While the property curbs announced by the Singapore government on July 5 to raise additional buyer’s stamp duty (ABSD) and lower the loan-to-value (LTV) ratio could dampen housing loan growth, RHB is forecasting mid-to-high single digit loan growth pa during FY18-20.
That’s because RHB’s sensitivity analysis concluded that a 1ppt slowdown in loan growth would be offset by a 10bps rise in the SIBOR. In other words, the impact of the property cooling measures would be offset by the expected increases in the Sibor over the next few quarters.
RHB’s preferred banking stock is UOB which it sees as a beneficiary of rising FFR. UOB’s NIM is expected to widen to 1.97% by FY20 from 1Q18’s 1.84%. Its ROE also improved to 11% in 1Q18 from 4Q17’s 9.8% and management is guiding for 12% ROE by end 2019.
More importantly, UOB’s intention to lower CET1 CAR should translate into higher dividends, which could drive its share price higher.
“Our UOB target price is $33.30, equivalent to 1.43 times 2019F book – similar to the P/BV level in 2007 after four years of FFR hikes,” says RHB analyst Leng Seng Choon in a Friday report.
DBS is also attractive to RHB as earnings will improve the most from every 1bp rise in the SIBOR. While the ongoing trade war between the US and China could slow DBS’s loan growth compared to its peers, we believe the rise in the Sibor could offset the negatives.
In the previous FFR upcycle between mid-2003 and mid-2007, FFR rose to more than 5% from 1%. During that time, DBS’s P/BV correspondingly rose to as high as 1.9x from 1.04x. Currently, the bank is trading at only 1.26x 2019F book. RHV’s target P/BV for DBS is set at 1.47x, yielding a target price of $30.30.
As at 12.17pm, shares in UOB are down 37 cents at $26.18 while shares in DBS are down 34 cents at $25.91.
