From the high of 3407.02 on 29 April to 3,126.09 on 15 August, the STI lost 8.3 percent on rekindled fears of a global slowdown stemming from the US-China trade war.
On 2 August 2019, US announced a new round of 10 percent tariffs on US$300 billion of Chinese imports effective on 1 September 2019. In retaliation, China let the Yuan weaken past the psychologically important level of Rmb7 to US$1, the weakest level since 2008.
Despite the recent pullback, Phillip Securities remains optimistic that the local bourse would trend higher in 2H19 and estimates STI to end the year at 3,600.
The stock market selloff has been particularly painful for the financial sector, especially after the Federal Reserve cut interest rates by 0.25 percent, the first in more than a decade. However, the big selloff opens a buying opportunity that may not be available for too long hence investors can use the pullback as an opportunity to buy into the following two financial stocks:
United Overseas Bank
Benefitting from resilient loans growth and strong trading income, United Overseas Bank’s (UOB) latest 2Q19 results beat street estimates. Despite the year-on-year (y-o-y) net interest margin (NIM) registering yet another disappointing quarter, the quarter-to-quarter (q-o-q) improving trend owing to lower funding costs should allow for a better 2H19.
UOB is well placed to handle macro pressures with its new non-performing assets (NPA) creation increasing by 1.4 times y-o-y as well as writebacks growing by 2.1 times. The aggressive provisioning during the 2017 oil and marine (O&M) crisis may now open potential for upside surprise writebacks. In addition, non-performing loans (NPLs) in O&M segment reduced by 39 percent y-o-y in 2Q19 alone.
Asset quality remained resilient with NPL ratio at 1.5 percent. Meanwhile, UOB has a total provisioning cover of 83 percent and a strong capital position with Common Equity Tier 1 capital adequacy ratio (CET-1 CAR) at 13.9 percent.
The bank is rated “accumulate” by Phillips Securities with a lower target price of $28.60. UOB shares closed at a price of $26.05 each, which translates to a forward FY19 price-to-book (P/B) ratio of 1.06 times and a forward-FY19 dividend yield of 4.5 percent.
Singapore Exchange (SGX) beat forecasts with record revenue of $909.8 million since listing and the highest net profit of $391.1 million in 11 years driven by the China A50 Index futures, where FY19 derivatives volumes surged 41.3 percent y-o-y to 105.8 million.
Strength in China A50 Index futures trading offset the weakness in equities performance from soft securities daily average value (SDAV). Analysts believe the continued market volatility will keep derivatives volume firm.
However, with the potential competition from Hong Kong Exchange’s (HKEX) launch of A50 Index futures, Phillips Securities held its forecast of derivatives daily average volume (DDAV) unchanged at 1.113 million and 1.205 million for FY20-21E respectively. Regardless, analysts believe HKEX’s launch of A-share contracts may pose headwinds given the recent unrest in Hong Kong.
In addition, analysts remain optimistic that SGX’s strength in a diversified product suite will further support derivatives volume growth and open interest in FY20.
Phillips Securities maintain “accumulate” with an unchanged target price of $8.09. SGX shares closed at a price of $8.25 each, which translates to a forward FY20 P/B ratio of 8.1 times and a forward-FY19 dividend yield of 4.21 percent.