A Goldman Sachs May 10 report on local banks sounds decidedly bearish. “Our assessment shows Singapore banks’ shares are pricing in an 18% probability of a recession when we compare our base case and recession scenario-implied valuation relative to where the stocks are trading [now] versus their year-to-date peak,” says Goldman.
“In our recession scenario, we stress-tested 2023 earnings by factoring in Fed rates returning to zero, slower loan growth, higher credit cost and pressure on net interest income which gives us an average –44% EPS downside risk versus our base case,” it adds.
Goldman and other foreign research outfits were bullish on DBS Group Holdings. Some of them still are although group CEO Piyush Gupta did not sound as bullish about the outlook on April 29 compared to Feb 14. He remained largely sanguine on the bank’s outlook and its own pipeline of loans. He also reiterated that a rise of 100bps could increase DBS’s net interest income by as much as $2 billion annually.
As Goldman looked back at past recession scenarios, the EPS of banks slowed in the one to three quarters leading into the recession in the past two recessions and contracted by an average of 27% during a recession.
Valuations were compressed by an average of 50% in both P/E and P/B multiples. Share prices tend to pull back around 12 months after the inversion of the US yield curve and eight months before the recession actually occurred. Goldman’s economists see the probability of a recession in the US at 15% in the next 12 months and at 35% in the next two years.
Within Asean, Singapore is the most vulnerable because of its open economy. “Given the uncertain economic outlook, share prices could see near-term volatility which may also cap valuation multiples,” Goldman says.
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However, the US investment bank has not changed its earnings estimates but cut its P/E and P/B multiples. Hence, Goldman expects the target prices to fall over the next 12 months although it has maintained “buy” ratings for all three banks.
At any rate, the price chart of DBS does indeed suggest some continued weakness. The gaps and black candles that have materialised since the announcement of its 1QFY2022 ended March business updates on April 29 show no signs of abating. Unfortunately too, on May 10, prices fell below the 200-day moving average. Support appears at around $29.90, suggesting that prices could well fall below the key psychological support of $30. What happens at that point depends on how volume and price are behaving. What could happen next is for prices to dip sharply but briefly below $29.90 and then hang around that level. Price patterns could then form dojis and small black and white candles as volume contracts. That would indicate that selling pressure is abating.
Separately, iFast Corp’s chart pattern can be said to be a textbook pattern. The steady uptrend of 2020 and 2021 has given way to a top formation which took several months to form in the second half of last year.
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Prices have already broken down from the initial top and they continued to form larger toppish patterns, indicating lower levels. In March, prices fell below the $6.16 to $6.27 range, which is a neckline indicating a potential downside of below $3.
The sub-$3 target represents a probability but often markets can change their mind. For the time being though, the trend remains downwards, indicators continue to show a bearish bias, and the downside could well be achieved — unless prices regain $4.91. The declining 50-day moving average is at $5.67.
