Analysts split on Singapore’s banking sector outlook even as safe-haven status remains ‘intact’

[SINGAPORE] Analysts continue to find Singapore attractive for its stability and resilience even amid the Middle East conflict, though they are divided in their views on the outlook for its banking sector.

The Republic kept its safe-haven status “intact” in March, with “sustained fund inflows into Singapore equities”, said DBS Group Research on Thursday (Apr 2).

Analysts Yeo Kee Yan and Foo Fang Boon noted that Singapore has performed well relative to regional peers.

They pointed out that the resumption of oil flows through the Strait of Hormuz remains the “key catalyst” for markets, including the Republic’s benchmark Straits Times Index (STI).

The Strait of Hormuz is a critical waterway that normally carries about a fifth of global oil and liquefied natural gas.

US President Donald Trump said on Apr 1 that the war is expected to last for another two to three weeks. “We are going to finish the job, and we’re going to finish it very fast,” he said.

While the DBS analysts noted that the recent rise in Brent “may support NIM (net interest margin) expansion for index heavyweight banks”, they cautioned that the benefit “may prove short-lived”.

“Index heavyweight banks have played a key role in STI’s relative outperformance versus regional indices, as investors focused on potential NIM expansion rather than growth risks,” they explained.

“While this narrative has been supportive for banks... the positive correlation between interest rate and oil prices is likely to weaken or even turn negative over time.”

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If oil prices move toward US$150 a barrel, for example, recession fears are “likely to outweigh” NIM gains. “In such a scenario,” Yeo and Foo said, “the STI – despite being one of the region’s more resilient indices – risks becoming the last shoe to drop if oil continues to rise.”

“Politically neutral, well-regulated”

UOB KayHian Group Research analyst Jonathan Koh, meanwhile, remains “overweight” on Singapore’s banking sector.

“Singapore banks benefit indirectly from the escalation of conflicts in the Middle East as global investors and high-net-worth individuals seek stability and asset protection in politically neutral, well-regulated financial hubs,” he explained in a Mar 30 report.

“Heightened geopolitical uncertainties have reinforced Singapore’s safe-haven appeal, driving deposit growth and wealth management inflows into local banks,” he added, noting that this has come “particularly from Middle East-based clients reallocating assets away from perceived riskier jurisdictions in the Gulf region, such as Dubai”.

Koh pointed out that such inflows “support balance-sheet liquidity and fee-based income, especially in private banking and trading activities amid increased market volatility”.

Still, he acknowledged that the Middle East conflict “exacerbates geopolitical and macro uncertainties”, identifying an escalation of the conflict as a risk to Singapore’s banking sector.

The analyst has “buy” ratings on DBS and OCBC . He noted that both lenders’ yield spreads are more than one standard deviation above the long-term mean, though DBS’ is higher at 3.3 per cent, compared to OCBC’s 1.6 per cent.

His target price on DBS is S$67.55, and S$25.30 for OCBC.

Cycling up and down

DBS’ Yeo and Foo said that without a clear resolution to the conflict, markets are “likely to rotate between escalation and de-escalation trades” in April.

They added that renewed tensions keeping oil prices elevated would support agri-commodity names, such as Wilmar International , First Resources and Bumitama Agri , as well as utility stock Sembcorp Industries .

For Yeo and Foo, a worst-case scenario – where oil prices remain elevated at over US$100 a barrel for longer – would be positive for oil and gas counters Seatrium and Nam Cheong .

Such a situation would also benefit defensives, including DFI Retail Group and NetLink NBN Trust , but would weigh on hotel real estate investment trusts (Reits) and consumer discretionary stocks.

The DBS analysts added that, on the flip side, any credible de-escalation that eases oil prices and inflation fears would benefit property players, such as UOL and City Developments Ltd .

This scenario would also be a boost for Reits such as CapitaLand Integrated Commercial Trust and Mapletree Logistics Trust , in addition to transport counters, including Sats .

Looking beyond the near term, Yeo and Foo said that “continued volatility without resolution is likely to gradually shift attention to stocks with resilient drivers independent of geopolitics”.

These include banks, the Singapore Exchange and tech counters such as UMS and iFast , they added.