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The time to invest in banks is now, says RHB

Amala Balakrishner
Amala Balakrishner  • 4 min read
The time to invest in banks is now, says RHB
Prospects of a sharp earnings recovery have lifted the share prices of Singapore’s 3 banks by 19% ytd, note analysts at RHB.
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RHB Group Research is maintaining its “overweight” stance on the banking sector amid expectations that Singapore banks’ robust performance in 1H2021 will extend into the second half of the year.

“The recent movement restrictions’ impact should be moderate,” the analysts elaborate in a July 2 note.

The team’s stance follows the Monetary Authority of Singapore’s (MAS) recent announcement that the republic’s 2021 gross domestic product (GDP) growth range should exceed the upper end of its 4% to 6% forecast range.


See: Singapore's GDP growth could exceed upper end of 4% to 6% forecast range: Menon

While the recent tightening of domestic restrictions and border controls are expected to set Singapore’s economy back by 8% in the near-term, RHB’s analysts say a recovery is still possible in 2H2021.

This will be “supported by strengthening global demand and more progress in Singapore’s vaccination programme,” the analysts say.

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Against this backdrop, they observe that the banks are on track to lowering their credit costs this year.

Loans requiring relief assistance are predicted to tick up from levels 1-2% of gross loans in March 2021 due to the recent movement restrictions, the analysts add.

To this end, core fee income – a key growth driver for banks in 1Q2021 – is deemed to remain as an important driver in 2H2021.

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“The low interest rate environment would continue to drive demand for investment products while transaction service fees would rise on the expected pick-up in trade-related activities,” RHB’s analysts point out.

Card fees are also slated to drive growth thanks to the rapid adoption of e-payments and a surge in household spending.

Given these factors, the analysts are expecting a 14.7% y-o-y lift in core fee income in FY2021.

Singapore’s bank lending had edged up by 0.2% in May on the back of a pick up in loans to businesses, MAS announced on June 30.

Loans through the domestic banking unit – which captures lending in all currencies but mainly reflects Singapore-dollar lending – were up for the seventh consecutive month to $693.72 billion in May.

Business loans ticked up by 0.2% on a m-o-m basis to $428.48 billion in May, after logging a flattish performance in the previous month.

Loans to building and construction – which make up the single largest business segment – inched up by 0.1% to $152.37 billion. Loans disbursed for manufacturing meanwhile rose by 5.1% to $28.26 billion, reversing the 3.4% decline registered in the previous month.

For more stories about where money flows, click here for Capital Section

Consumer loans maintained its growth streak with a 0.3% edge up to $265.25 billion.

Overall, Singapore’s bank lending was up by 1.2% on a y-o-y basis, faster that the 0.4% rise in April.

For more stories about where the money flows, click here for our Capital section

RHB’s analysts are expecting loan growth to strengthen to 8.7% y-o-y in FY2021, higher than the 3.4% seen last year.

They point to general commerce, financial services, manufacturing and residential property sectors, as contributors to the rise in overall loan growth.

Looking ahead, the analysts stress that the “banks’ asset quality is resilient as evident by the lower-than-expected take-up of extended relief measures and majority of borrowers being able to resume full loan repayments”.

“This reinforces our view that credit cost, a key earnings driver this year, would trend lower – our projected 37% y-o-y rebound in FY2021 net profit (FY2020: -28%) remains intact,” they add.

Prospects of a sharp earnings recovery have lifted the share prices of Singapore’s three banks by 19% year-to-date, causing them to outperform the Straits Times Index and their regional peers.

The sector’s valuation has also reverted to its historical mean at 1.1x price-to-book value, RHB’s analysts highlight.

Their top picks include Oversea-Chinese Banking Corp (OCBC) and the United Overseas Bank (UOB).

Analysts from SAC Capital are expecting an impending announcement from the MAS if there will be an extension of the current dividend caps on Singapore’s three banks.

“We do not expect the FY2020 dividends that were held back to be distributed, unlike the US banks,” they elaborate in a weekly note.

Shares in OCBC dropped 2 cents or 0.168% to $11.88 while that in UOB was up 9 cents or 0.349% to $25.85. DBS meanwhile closed at $30.08, up 7 cents or 0.233%.

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