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Broker's take: RHB upgrades Singapore bank sector to 'overweight' on interest margin outlook

RHB Research reason has upgraded its banking sector call to 'overweight' from 'neutral' on the prospect of higher net interest margins (NIMs) from rising US federal funds rate (FFR) and a firmer Singapore Interbank Offered Rate (Sibor).

The broker said the upgrade was in part driven by the fact that banks' recent share price correction has already "factored in significant negatives" from the Singapore Government's property cooling measures.

UOB, with its lower exposure to China and potential for higher dividends, is RHB's preferred pick with a S$33.30 target price, while DBS is also a buy in RHB's books, with a S$30.30 target price.

RHB forecasts DBS and UOB to record average NIM of 1.96 per cent in fiscal 2020, up from the two banks' Q1 2018 average NIM of 1.84 per cent.

"This is premised on further hikes in the US federal funds rate (FFR) and the Sibor. We believe our NIM forecast for FY 2020 is conservative – this is as in the last cycle, after four to five years of FFR hikes (starting FY 2003), the three big banks recorded average NIM of 2.19 per cent in FY 2008," RHB said.

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RHB also noted that the impact of the Singapore Government's property cooling measures would be offset by the expected increases in Sibor over the next few quarters.

"The 3-month Sibor has risen to 1.63 per cent. We did a sensitivity analysis which examined the likely impact on earnings from a 10bps (basis points) rise in the Sibor, as well as a 1ppt (percentage point) fall in loan growth. Our conclusion is that a 1ppt slowdown in loan growth would be offset by a 10bps rise in the Sibor," RHB said.

It also forecasts a "mid-to-high" single digit loan growth per year till fiscal 2020.

"Whilst the property cooling measures are negative for Singapore banks' earnings growth, we believe the impact will be relatively muted. We maintain our forecast for Singapore banks' loan growth of mid to high single digit pa (per annum) for FY 2018-2020, which we see as relatively conservative," the broker said.

RHB said the downside risks to its forecasts include global macro uncertainties like the US-China trade war and higher impairment charges.

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