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UOB is DBS's top pick while OCBC is cut to 'hold' on dividend policy overhang

Uma Devi

SINGAPORE (June 25): DBS Group Research is retaining United Overseas Bank (UOB) as its top pick among Singapore banks while Oversea-Chinese Banking Corporation (OCBC) has been downgraded to “hold” with a target price of $11.50.

DBS likes UOB for its high dividend yield of 4.7%, strong capital profile and least exposure to Greater China. However, OCBC’s dividend policy could continue to weigh on its share price performance while inorganic growth opportunities may encounter execution risks.

Overall, DBS expects modest net interest margin (NIM) expansion of 2-5 bps, moderating loan growth and lower than historical average credit costs to support earnings growth for Singapore banks of some 7%.

“While there are concerns of easing global growth, we believe loan growth continues to be supported by large infrastructure related loans within Singapore,” says analyst Lim Rui Wen.

A cut in the US Fed funds rate is also likely to pose downside earnings risks for banks in FY20F even though it may spur liquidity-driven rally as repricing loans will take time and may not materialise in 2H19.

Currently, DBS still expects marginal NIM expansion in FY19F. For FY20F, its sensitivity analysis shows that every 25 bps cut in interest rates will have 1-3bps impact on NIM and very 10bps change in NIM has 5-7% earnings impact on banks’ FY20F bottom line.

“We are currently forecasting largely flattish NIM through FY20F,” adds Lim.

While UOB continues to guide for flat NIM through FY19F amid higher cost of funds coupled with competitive pressures in wholesale banking loan yields, DBS believes OCBC is still poised to see further uptick in NIM as it continues to reprice its loan book.

Meanwhile, home mortgages continue to decline for the third straight month, as Singapore’s mortgages book registered a 0.3% m-o-m decline in April.

DBS property analyst Derek Tan says, “Overall developer sales are unlikely to slump significantly supported by robust yearly household formation but, in the meantime, popular projects will see better sell-through rates. We do not expect the mortgage book to contract severely, unless there is an accelerated slowdown in the economy with massive unemployment.”

As at 3.15pm, shares in UOB are trading at $25.74 at 11.1 times FY19F earnings while shares in OCBC are trading at $11.26 or 10.9 times FY19F earnings.