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Analysts remain 'overweight' on Singapore banks; SVB seen as a 'non-event' for the sector

CLSA has upped its target prices for all three banks and see NIMs peaking at around 1Q2024.

Analysts are remaining positive on the Singapore banking sector following the collapse of US banks, Silicon Valley Bank (SVB) and Signature Bank. SVB closed on March 10 while Signature Bank was shut down on March 12.

Another institution, Silvergate Capital, shut down its payment network, Silvergate Exchange Network, and liquidated its bank on March 10.

UOB Kay Hian analyst Jonathan Koh is advising investors to “keep calm and carry on” as he sees SVB’s demise as only disruptive for financing start-ups in the US.

“Decisive actions taken by the authorities and regulators should restore confidence. We expect nerves to calm once investors realise that contagion from the three banks did not spread to the broader economy,” Koh writes.

The Monetary Authority of Singapore (MAS), on March 13, announced that the Singapore banking system has “insignificant exposures” to the failed US banks and that the Singapore dollar (SGD) money market and foreign exchange market continue to function well.

In his March 15 report, Koh kept his “overweight” rating on the Singapore banking sector with unchanged “buy” calls for DBS Group Holdings D05 and Oversea-Chinese Banking Corporation (OCBC) O39. OCBC has, however, inched forward to become Koh’s top pick due to its new dividend policy.

Koh’s target prices for DBS and OCBC, at $42 and $16.92 respectively, translate to an FY2023 dividend yield of 5.2% and 6.2% respectively.

To him, Singapore’s banks should benefit from the ongoing hikes in interest rates and net interest margin (NIM) expansion on a full-year basis in 2023.

“Shareholders would be rewarded with higher dividends in tandem with the strong growth in earnings,” says Koh.

CLSA’s Neel Sinha and Lin Daxin have also kept their “overweight” rating on the Singapore banking sector with “buy” calls for all three banks.

To Sinha and Lin, the collapse of SVB has no impact on Singapore’s banks, with them calling it a “non-event”. The banks have no primary or secondary exposure, although they are unsure about any third-degree impact, which is harder to determine, they write.

“Overall, developed markets outside Asia account for [around] 15% - 16% of the asset books, Australia, UK accounting for the lion’s share and largely property centric loans from SG corporates venturing overseas,” they add.

The drop in the banks’ share prices following SVB’s shutdown were also deemed as unjustified by the analysts.

Further to their report on March 14, the analysts see the banks benefitting from the net interest margin (NIM) expansion cycle, which should continue for another three to four quarters “at least”.

That said, they see the pace of NIMs to slow on a q-o-q basis as the US Federal Funds Rate (FFR) peak, given the liability book pricing has a few months lag to the asset re-pricing.

To this end, Sinha and Lin expect NIMs to peak at around 2.2% to 2.3% around the 1Q2024 from 1Q2022’s 1.4% to 1.65%. “This is on the premise of a 5.25% FFR exit rate, Fed policy being the wild card,” they write.

As the NIM cycle peaks, the CLSA analysts expect a recovery in non-interest income to be the “next lever” along with loan growth. All three banks are guiding for a double-digit fee income growth in the FY2023 from the previous year’s low base.

The biggest driver from non-interest income fees will come from wealth management fee, transaction and loan-related fees, as well as cards.

“Assets under management (AUM) for all the banks have continued to grow through the year. Yet, wealth management fees ([which] used to account for [around] 15% - 18% of revenue pre-pandemic) has shrunk significantly through the rising rate cycle as investors have been in a risk-off mode, sitting on the sidelines,” the analysts point out.

“Loan growth likely to be the other lever with the banks expecting mid-single digit levels; regional currencies the wild card against an expectedly strong Singapore dollar,” they add.

In the analysts’ view, the banks’ asset quality looks “sound” with non-performing loan (NPL) ratios continuing to remain benign. DBS’s NPL stood at 1.1% as at the 4QFY2022, OCBC’s stood at 1.2% while United Overseas Bank's (UOB) U11 stood at 1.6%. All three banks’ FY end in December.

“We think the tail risks on asset quality from the government-led loan moratorium programs in ex-Singapore Asean have now largely faded as have the risks of any China property related exposure, both factors a concern for investors last year,” they write.

Following their “buy” calls for all three banks, the CLSA analysts have raised their target prices for DBS, OCBC and UOB to $43.80, $16.20 and $39.70 from $43.40, $15.80 and $37.30 previously.

The higher target prices are due to the banks’ changes following their FY2022 results, a higher return on equity (ROE) outlook and valuation roll-over to FY2024 on CLSA’s Gordon growth model (GGM).

“Valuation methodology on GGM and underlying assumptions of 9.5% cost of equity and 3% long term growth assumptions [are] unchanged,” they write.

Shares in DBS, OCBC and UOB closed $32.55, $12.15 and $28 respectively on March 16.

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