SINGAPORE (Dec 20): DBS Group Research says it expects Singapore banks to deliver “resilient” earnings growth of close to 8% in FY19, following a record year in FY18 with earnings rising 27% y-o-y.
“While growth in non-interest income may be moderated due to weaker market-related income, stronger net interest income and low credit costs should still continue to support the banks’ performance,” says analyst Lim Rui Wen in a 2019 outlook and strategy report.
Overall, the research house forecasts an uplift in net interest margins going into 2019, with an improvement of at least 6-7 basis points y-o-y.
“Going into 2019, we still see strength in USD, which should bode well for sustained rise in SIBOR/SOR rates,” Lim says. “Meanwhile, we believe that ongoing loans repricing on both floating and fixed loans should continue to support increase in loan yields, which should outpace the rise in cost of funds. Notably, SGD fixed deposit rates have also been on the rise.”
Lim notes that both UOB and OCBC have seen annualised loan growth of close to 10% so far this year. For FY19, the analyst forecasts that sector growth will moderate to around 6-7%.
“We believe that loan growth will continue to be supported by drawdowns from property development projects and regional corporate loans, moderating to mid to high single digit for the Singapore banks in 2019,” Lim says. “In the longer term, we continue to see Singapore banks as potential beneficiaries from trade diversion into the Southeast Asian region.”
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After a fantastic rally from the start of 2017 to 1Q18, Lim says Singapore banks have derated largely on the back of the escalation of US-China trade tensions as well as property cooling measures imposed in July.
“Barring any further developments in US-China relations, we believe that sustained momentum of NIM alongside mid to higher single digit loan growth and low credit costs should lift valuations back to at least mean P/BV multiples,” Lim adds.
DBS has “buy” calls on UOB and OCBC with target prices at $29.50 and $13.20, respectively.
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However, it prefers UOB over OCBC due to the former’s strong dividend yield support and strong capital position. Lim says UOB is also a defensive pick as it has a smaller exposure to China among the local banks and a more defensive wealth franchise.
As at 2.52pm, shares in UOB are trading 20 cents lower at $21.16 while shares in OCBC are trading 12 cents lower at $11.02.
