Brokers' take: Analysts downgrade Singapore banks after Fed rate cut

ANALYSTS are expecting a compression on the net interest margins (NIM) of Singapore banks in their fiscal 2020 forecast following the Federal Reserve's emergency rate cut.

In a sector note on Wednesday, CGS-CIMB downgraded the Singapore bank sector to "neutral" from "overweight", factoring in revenue headwinds. It also noted that the banks' approximate 5 per cent dividend yields will still serve as a key support factor to the banks' valuations.

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 March/April's Federal Open Market Committee meeting spilling into FY2021 forecast.

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

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.

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Both research houses are maintaining "hold" on OCBC Bank, with DBS lowering OCBC's target price to S$11.00, from S$11.50 previously. CGS-CIMB lowered its target price for OCBC to S$11.05.

Out of the three lenders, CGS-CIMB said it prefers DBS for its better track record of margin management, dividend visibility and small and medium enterprise portfolio. However, it has downgraded DBS to "hold", with a lower target price of S$24.33.

Singapore banks were trading in the red as at 11.06am on Thursday. DBS shares were trading at S$23.75, down S$0.16 or 0.7 per cent on a cum-dividend basis.

UOB shares were at S$23.88, down S$0.12 or 0.5 per cent on a cum-dividend basis, while OCBC Bank was trading at S$10.52, down S$0.03 or 0.3 per cent on a cum-dividend basis.

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 virus outbreak.