Inflation is easing in the US, according to figures released on Jan 12, offering the US Federal Reserve precious space to downshift to a quarter-point hike in February.
US inflation continued to slow in December 2022, with the overall consumer price index (CPI) falling 0.1% m-o-m but up 6.5% y-o-y, the lowest rise since October 2021. Excluding food and energy, core CPI rose 0.3% m-o-m and 5.7% y-o-y, the slowest pace since December 2021.
With higher terminal rates looming on the horizon, UOB Kay Hian (UOBKH) analyst Jonathan Koh is maintaining an “overweight” on Singapore banks. Banks benefit from the ongoing hikes in interest rates and net interest margin (NIM) expansion on a full-year basis in 2023, says Koh, with DBS most sensitive to higher interest rates.
In a Jan 6 note, Koh is maintaining “buy” on DBS Group Holdings with a higher target price of $46.95 from $45 previously, and similarly so for Oversea-Chinese Banking Corporation (OCBC) with a higher target price of $18.32 from $18.28 previously. “Shareholders would be rewarded with higher dividends in tandem with the strong growth in earnings. We expect DBS and OCBC to increase the dividend per share (DPS) by 17% and 7% respectively to $1.68 (42 cents per quarter) and 60 cents (30 cents each for 1HFY2023 and 2HFY2023) in 2023.”
In particular, OCBC and United Overseas Bank (UOB), with a bigger proportion of their earnings from Southeast Asia, will benefit from the reorientation of supply chains towards Asean countries, says Koh. “Asean countries have a large population of 680 million and account for about 8% of global exports. Many multinational companies have adopted the China + 1 strategy and have plans to set up alternative production facilities within the Asean region,” writes Koh. “Malaysia, Thailand and Vietnam saw growth in the inflow of foreign domestic investments (FDI) for manufacturing; Indonesia is receiving FDI for the processing of its mineral resources.”
OCBC Bank chief economist Selena Ling expects the Fed’s actions to result in a hard landing for the US economy, consequently affecting global markets.
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“Fed chair Powell warns that the terminal Fed funds rate is higher than initially anticipated,” says Ling in a Jan 12 media briefing, before the release of US CPI numbers. “History is not on the side of the Fed; when they embark on this kind of very aggressive tightening, [from] 0% to 4%, potentially 5%-plus very soon, they will precipitate a hard landing.”
With a 2023 full-year forecast teetering on 0.1% growth in the US, Ling expects “a quarter or two” of outright contractions. “Whether we get a full contraction really depends on whether [the Fed] pauses [rate hikes] by the middle of this year.”
Likewise, Singapore’s GDP forecast is set to fall from a projected 3.5% in 2022 to 2.0% in 2023, says Ling.
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Amid a softer GDP outlook, Singapore’s banks are seeing a slowdown in growth, write CGS-CIMB Research analysts Andrea Choong and Lim Siew Khee. CGS-CIMB Research forecasts 3.8% GDP growth in 2022 and 2.0% in 2023.
In a Jan 2 note, Choong and Lim are maintaining “neutral” on the banking sector here, with a “hold” call on DBS and a target price of $36.50. Meanwhile, OCBC and top pick UOB receive “add” calls with target prices of $13.70 and $34.80 respectively.
Taking into view the likelihood of slower system loan growth in 4QFY2022 ended December, Choong and Lim expect Singapore banks to record between 5%–7% loan growth in FY2022, compared to FY2021’s 5%–11%.
Choong and Lim say investors can expect more modest loan growth in FY2023 amid a softer GDP outlook. “We highlight that the weaker loan growth could persist into FY2023, in line with a softer Singapore GDP growth outlook. In tandem, we expect loan growth to ease towards 4%–5% in FY2023.”
JP Morgan is forecasting that Singapore bank share prices will fall later in 2023 owing to rising non-performing loans (NPL). JP Morgan is “neutral” on DBS and OCBC but optimistic on UOB, which earns an “overweight” rating. UOB wins with its acquisition of Citi’s regional operations, says JP Morgan.
In the near term, UOB’s share price has outperformed its two other peers: UOB is up 13% since the release of its 3QFY2022 ended September results on Oct 28, 2022; compared with 2% for DBS and flat for OCBC.
DBS Group Research analysts Yeo Kee Yan and Janice Chua think Singapore’s banks will deliver earnings growth of 12.90%, while improvements in non-interest income should make up for the limited upside from narrowing net interest margin (NIM) this year.
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Like JP Morgan, the DBS analysts’ top pick is UOB, whose NIM is expected to continue to grow into 1HFY2023.
In a Jan 3 note, Yeo and Chua expect UOB to reach a target price of $34.20, which represents an upside of 12.05% against its Jan 13 traded price of $30.52; and a 5.1% dividend yield.
“Singapore banks emerged the strongest in the region from the pandemic and continued to benefit from strong improvements in NIM in a rising rates environment,” write Yeo and Chua. “We believe continued earnings performance and a good dividend yield of 5%, with potential for higher dividends, will continue to support valuations in FY2023, as we expect a sector earnings growth of more than 10%.”
