Analysts downgrade Singapore banks after US Fed rate cut

Singapore

ANALYSTS have downgraded their ratings for Singapore banks following the Federal Reserve's emergency rate cut on Tuesday, with the rate cut expected to compress the net interest margins (NIM) reported by the trio.

The Fed had on Tuesday announced a 50 basis point interest rate cut as part of emergency measures, on fears of slowing economic growth amid the Covid-19 outbreak.

In a sector note on Wednesday, CGS-CIMB downgraded the Singapore bank sector to "neutral" from "overweight" as banks' revenues are expected to take a hit. CGS-CIMB analysts Andrea Choong and Lim Siew Khee are expecting a NIM compression of 10 to 12 basis points in their FY2020 forecast.

They are also factoring in added pressure from a "highly probable" 25 to 50 basis point rate cut in the upcoming Federal Open Market Committee meeting. "The resilience in Singapore dollar rates may falter," they added.

The brokerage said that the banks' approximate 5 per cent dividend yields will still serve as a key support factor to the banks' valuations.

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DBS Group Research is forecasting a six to nine basis point NIM decline across the banks, said analyst Lim Rui Wen. Ongoing competition in mortgages and flight to quality loans will also further compress loan yields.

"Following the Fed's move, as well as Hong Kong's rate cut in tandem, we believe there is further SIBOR/SOR (Singapore Interbank Offered Rate/

Swap Offer Rate) downside," she added.

DBS Group Research has downgraded United Overseas Bank (UOB) to "hold", lowering its target price for UOB to S$25.50, from S$27.20 previously. Similarly, CGS-CIMB has downgraded UOB to "hold" and lowered its target price for UOB to S$24.91 from its target price on Feb 28 of S$28.39.

UOB shares closed at S$23.74 on Thursday, down S$0.26 or 1.1 per cent on a cum-dividend basis.

CGS-CIMB and DBS Group Research are maintaining "hold" on their ratings for OCBC Bank. DBS Group Research lowered OCBC's target price to S$11.00, from S$11.50 previously, while CGS-CIMB lowered its target price for OCBC to S$11.05 from its target price on Feb 28 of S$11.64.

Shares of OCBC closed at S$10.42 on Thursday, down S$0.13 or 1.2 per cent on a cum-dividend basis.

As for DBS, CGS-CIMB downgraded its rating to "hold", with a lower target price of S$24.33 from its target price on Feb 28 of S$27.09.

That said, CGS-CIMB said it prefers DBS out of the three lenders for its better track record of margin management, dividend visibility and small and medium enterprise portfolio.

Meanwhile, OCBC Investment Research maintained a "hold" rating for DBS with a lowered fair value estimate of S$25.50, compared to its fair value estimate of S$27.50 from a Feb 13 report.

The fair value estimate for DBS also accounts for the risk of a more prolonged virus outbreak situation than anticipated before.

In addition, OCBC Investment Research noted that DBS is relatively more rate sensitive compared to UOB, given its larger proportion of US dollar-denominated loans and a higher ratio of deposits in its current and savings accounts to total deposits. The bank's capital position, however, remains solid, the report added.

DBS shares closed at S$23.60 on Thursday, down S$0.31 or 1.3 per cent on a cum-dividend basis.