CGS-CIMB Research analysts Andrea Choong and Lim Siew Khee have maintained their “overweight” rating on the Singapore banking sector as the US Federal Reserve (Fed) signalled sooner-than-expected rate hikes.
The Fed, on June 17 (Singapore time), indicated that it may see two interest rate hikes by end-2023, with an initial interest rate increase happening as soon as late-2022.
This is due to the expectations of inflation rates picking up faster than expected, says St. Louis Fed President James Bullard.
On this, Choong and Lim now see upside for Singapore banks’ net interest margins (NIMs) as early as FY2023.
Looking at previous cycles, it seems that shares in the three banks are beginning to re-rate prior to the actual rate hike.
To Choong and Lim, this implies a re-rating cycle beginning in the 2QFY2021 to 3QFY2021 in the event of rate hikes in FY2022, or around the 2QFY2022 to 3QFY2022 for the two rate hikes by the end of FY2023.
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“As Singapore banks have risen [some] 13-17% year-to-date (y-t-d), outperforming the Straits Times Index (STI) by 4-8%, we think that investors have started pricing in a reflation trade over the past few months as 10-year US treasury yields rose, implicitly spurring short-end rates,” write the analysts in a June 23 report.
“We think the increasing pace of Covid-19 vaccine roll-outs across the region, as a gauge of a timeline to regional economic re-openings and hopes of credit cost write-backs in FY2021, contributed to the rest of the share price optimism,” they add.
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To Choong and Lim, they believe investors should keep their positions in banks to reap the benefits of the economic rebound ahead.
This comes on the back of easing social distancing measures across the region, while share price momentum from rate hike expectations sets in.
“Trading at [around] 1 times FY2022 P/BV (1 standard deviation or s.d. below 10-year mean), UOB remains our top pick of the sector as a key beneficiary of Asean economic re-openings, which we expect should close its valuation gap with peers given investors’ concerns on asset quality,” they write.
The analysts have kept “add” on all three banks, DBS Group, OCBC and UOB with target price estimates of $32.64, $13.75 and $28.84 respectively.
The Monetary Authority of Singapore (MAS) is also due to announce its decision on the lifting of the dividend caps on banks before they announce their earnings for the 2QFY2021.
“We think that current conditions are ripe enough (sturdy Common Equity Tier 1 ratios of 14-15%, staggered government aid – job support scheme, financing line for SMEs – still in place, stabilising asset quality with portfolio of moratorium loans under control) to expect the cap to be lifted, but caution for some profit-taking as this news plays out,” note the analysts.
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As at 11.47am, shares in DBS, OCBC and UOB are trading at $29.23, $11.74 and $25.43 respectively. According to CGS-CIMB’s estimates, this represents 1.37 times, 1.09 times and 1 times P/BV for DBS, OCBC and UOB respectively.
Photo: Bloomberg
