SINGAPORE (Aug 23): Deutsche Bank says DBS Group Holdings remains its top pick within the Singapore banks sector, even after recently downgrading the stock to “hold” based on valuations following the bank’s recent run-up in share price post 2Q17 results.
The research house continues to prefer Singapore’s banks over those in Hong Kong on the observation that the former’s valuations appear less stretched, with the latter already having priced in more benefits of strong loan growth, margin expansion and expectation of a special dividend from Bank of China Hong Kong (BoCHK).
In a Wednesday report, analysts Franco Lam and Stephen Andrews explain that DBS is preferred within the sector for the group’s revival of its retail banking and wealth management (WM) business; its ability to re-energise and refocus its core Singapore operation; as well as its higher proportion of excess capital and more positive gearing in the rising rate environment.
Both its volume and net interest margin (NIM) expectations appear less stretched when compared to the Kong Kong banks, say the analysts, who also put forward the possibility of excess capital based on DBS’ fully-loaded CET1 of 14% and risk weight density of about 60% in 2Q17.
DBS is currently trading at 11.5 times its 2017E P/E ratio and 1.1 times book. It has a dividend yield of 3.3%.
In comparison, OCBC and UOB are trading at 11.7 and 11.8 times 2017E P/E as well as 1.2 times and 1.1 times book, with dividend yields of 3.3% and 3% respectively.
Regionally, Lam and Andrews say they are staying negative on domestic Hong Kong banks for now, with “sell” calls on both BoCHK and Bank of East Asia (BEA) as they believe the positive market sentiment has investors focusing on near-term positives while ignoring the challenges in the longer-run.
While Singapore’s domestic banks reflect a generally higher cost-to-income ratio of 44% versus Hong Kong’s 37% in 2016, the analysts say one of the key reasons for the lower returns is a less-efficient operating structure in the overseas markets.
“With much higher assets/profits generated outside of Singapore, the average revenue returns of Singapore banks were only slightly higher than those for Hong Kong banks, although they have been deteriorating in recent years. Plus, they spent much more on the expense side,” they explain.
“Singapore banks’ balance sheets were 55% larger than Hong Kong banks’, but their total headcounts were also 140% more, as we saw a higher proportion of expenses relative to revenue attributed to overseas markets.”
As at 12.37pm, shares in DBS, OCBC and UOB are trading at the respective prices of $20.59, $11.07 and $23.65.
