SINGAPORE (Aug 7): RHB Research is maintaining its “overweight” stance on Singapore’s banking sector with “buy” ratings for both United Overseas Bank (UOB) and DBS at target prices of $33.30 and $30.30, respectively.
In a Monday report, analyst Leng Seng Choon notes that 2Q18 results came generally in line with expectations, with “respectable” sequential growth in net interest income mainly driven by loan expansion.
See: UOB 2Q earnings hit high of $1.08 bil on strong overall operating income
See: DBS 2Q net profit up 20% to $1.37 bil from year ago; declares 60 cents interim dividend
He expects this trend to continue on modest loan expansion and widening net interest margins (NIMs) as interest rates continue to rise, with DBS and UOB’s NIMs forecasted to rise to 1.95% and 1.92%, respectively, in 2019.
UOB has been named as RHB’s top sector pick for its high CET1 CAR of 14.5% – which is above the industry average of 13.8% – which the research house believes will provide scope for more dividends and therefore serve as a share price catalyst for the bank, beyond its better prospects from NIM expansion.
According to RHB’s calculations, the bank could hypothetically give out $1.28 per share of dividends with its CET1 CAR likely to remain at 13.5%.
Based on sector-wide 2Q results of late, Leng notes lower q-o-q wealth management fees which in turn affected non-interest income contributions including that of DBS, whose weakness in 2Q net trading income came amid the flattening yield curve and widening Asian credit spreads.
Potential loan growth slowdown from property cooling measures poses another risk to the banking sector’s earnings prospects as well – although Heng does not view this as a major concern with the banks’ future earnings as this could be easily offset by a rise in SIBOR, in his view.
“Our sensitivity analysis shows that a 1ppt fall in 2019 loan expansion (e.g. reduction to 6% growth from 7%) could be offset by a 10bps rise in the SIBOR and this could keep net profit unchanged, provided other factors are constant,” he explains.
As at 11.18am, shares in DBS and UOB are trading at $26.77 and $27.95, respectively.
