ESG adoption up across Asean with DBS, Sembcorp and SGX top picks in Singapore: Maybank

Jovi Ho
6-min read
In this article:

“Strong capital levels, elevated margins and a wealth management turnaround should provide Singapore banks resilience.”

Environmental, social and governance (ESG) adoption has improved across Asean, according to Maybank Securities analysts Jigar Shah and Neerav Dalal, with top picks like Singapore-listed Sembcorp Industries U96, DBS Group D05 and Singapore Exchange (SGX) S68 set to continue to outperform.

Maybank Securities is staying “buy” on Sembcorp Industries and SGX, with target prices of $4.35 and $10.73 respectively.

That said, analyst Thilan Wickramasinghe has downgraded Singapore’s banks to “neutral”, citing rising risks to asset quality. After record profits and bumper dividends in FY2022 ended December, he believes it is “time for a pause”. “We believe the sector’s risk-reward is now largely balanced and see limited upside catalysts.”

Strong capital levels, elevated margins and a wealth management turnaround should provide Singapore banks the resilience to navigate the current tough environment, says Wickramasinghe in a March 13 note.

In addition, the collapse of SVB in the US is unlikely to create contagion in the broader banking system, according to Maybank Securities’ analysts. “SVB had a narrow deposit base (start-ups) and a narrow asset base. Meanwhile, Singapore’s banks have diversified deposits, while assets are largely loans that re-price along with interest rates.”

That said, the margin bonanza that lifted interest income may slow as funding costs catch up to rate hikes, they add.

Among the three local banks, Wickramasinghe’s top pick is DBS. He is maintaining “buy” on Singapore’s largest bank with a lower target price of $39.12.

“DBS’s strong execution since 2010 has structurally shifted their sustainable return on equity (ROEs) higher. This should support a higher trading multiple going forward,” he writes. “In the near term, net interest margins (NIMs) are set to remain higher for longer, although y-o-y growth could taper. Asset quality risks could be a key risk going forward in this high rate environment. Yet, the group’s strong provisioning, capital and high dividend yield provide some mitigation.”

United Overseas Bank (UOB) U11 and Oversea-Chinese Banking Corporation (OCBC) O39, however, have been downgraded to “hold”.

Slowing global growth could have a spill-over impact on asset quality in Asean, which accounts for 70% of UOB’s loan book, says Wickramasinghe. “While non-performing loans (NPLs) are currently benign, downside risks are rising going forward. This could drive credit charges higher.”

UOB’s NIM expansion could slow as funding costs rise, even though overall margins stay higher for longer, providing a scaffolding for better dividends, he adds. With risk-rewards more in balance in the medium term, Wickramsinghe has a target price of $31.73 on UOB.

Meanwhile, the analyst is “waiting for clarity” on OCBC. “Tailwinds from China reopening, higher for longer NIMs and high levels of capital puts OCBC in a strong position,” writes Wickramsinghe. “Nonetheless, dividend visibility is lower given changes to its dividend policy.”

At last month’s release of OCBC’s results for FY2022 ended December, the bank announced that it will target a payout ratio of 50% going forward. For comparison, OCBC paid a full-year dividend of 68 cents for FY2022, or 53% of its total earnings.

Additionally, the continued consolidation of its insurance business — Great Eastern — with the group further increases earnings volatility relative to its peers, says Wickramsinghe. “Separately, it is too soon to call on a rebound of OCBC’s wealth management business.”

With risk-rewards fairly balanced, Wickramsinghe lowers his target price for OCBC to $13.58.

Maybank’s ESG review

In August 2022, Maybank released a report of a study to assess ESG integration in Asean-6 markets, back-testing return profiles and performance versus regional MSCI indices over one, three and five years, sectors driving ESG performance and sector specific performance.

The Sustainalytics universe has increased to 628 stocks against 475 in Maybank’s earlier study. Malaysia, Singapore, Indonesia and Thailand formed 90% of Sustainalytics’ coverage. “We applied filters of negligible/low/medium Sustainalytics ESG risk rating, high/average quality of management and low controversies to ascertain low/medium ESG risk companies,” they add.

More than 53% of the low/medium ESG risk stocks belong to REITS, real estate, telecommunication and banking.

There are 225 companies (36% of total) out of 628 companies and 217 companies (36% of the total) out of the 609 listed companies that are compliant with the above three filters.

These 217 companies’ outperformance was 6.8%, 9.2% and 5.6% for one-, three- and five-year periods on a market cap weighted basis. “This reinforces the conclusion of our previous study that low/medium ESG risk companies generally out-perform the benchmark index due to favourable attributes and less volatility,” write Maybank Securities’ analysts.

Within Maybank Securities’ universe of low/medium ESG risk companies, REITs, banks, hotels & services, healthcare and transport saw projected one-year outperformance.

Meanwhile, the three- and five-year outperformance was driven by technology and telecom.

Consumer discretionary and staples have underperformed across one-, three- and five-year periods.

Others, which include sectors such as hotels & services, healthcare, gaming and transport, outperformed over one-year, driven by economic re-openings post Covid-19 lockdowns.

Overall, Maybank Securities’ analysts believe investors in Asean markets are still not fully factoring ESG risks into their investment strategy.

In addition, investors may not be currently factoring controversies and management quality in ascertaining ESG risks.

In contrast, stock prices of poor ESG companies in high risk sectors such as oil and gas and metals outperformed in the period following the Russia-Ukraine war, overshadowing the stock price performance of low ESG risk companies.

Various sustainability and ESG-driven indices underperformed the benchmark indices in 2022 mainly due to the refocus on fossil fuels to fulfil energy requirements and surge in the prices of metals and commodities. The Bloomberg Goldman Sachs Clean Energy Index and the Bloomberg Electric Vehicle Index fell 16.3% and 39.3% vs a 17.4% rise in S&P Global Oil Index.

High inflation and interest rates also hurt the share price performance of low ESG risk companies, and the amount of ESG-driven fund flow is lower in the region due to lack of more stringent investment regulations, with an Asean taxonomy yet to be finalised.

Though there was underperformance in 2022, sustainability indices outperformed the benchmarks for longer periods, say Maybank Securities’ analysts.

Over 2015-2022, the Morningstar Global Sustainability index (+76.9%) outperformed the Global markets Index (+73.9%), while the Eurozone Sustainability Index (+115.1%) bested the Eurozone Global Index (+61.3%) and the Asia ex-Japan Sustainability Index (+81.6%) did better than the Asia ex-Japan Global Index (+38.5%).

As at 10.28am, shares in DBS are trading 46 cents lower, or 1.41% down, at $32.24. Shares in Sembcorp and SGX are trading at $3.93 and $8.74 respectively.

See Also: