Broker's take: CGS-CIMB upgrades Singapore banks; dividends back in focus

CGS-CIMB has turned more positive on Singapore banks, as the brokerage expects credit costs to peak this year with asset quality holding steady moving forward.

Their return on equity (ROE) is also inching up, and dividends are coming back in focus, said CGS-CIMB analysts Andrea Choong and Lim Siew Khee.

They upgraded the sector to "overweight" from "neutral", and likewise upgraded DBS and OCBC to "add" while keeping UOB at "add", following the lenders' better-than-expected results for the third quarter.

The brokerage raised its target price to S$25.51 for DBS and to S$10.13 for OCBC. It maintained the S$22.52 target price for UOB.

As at 10.53am on Monday, shares of DBS were up S$0.43 or 1.9 per cent to S$22.92, OCBC gained S$0.15 or 1.7 per cent to S$9.08, while UOB rose S$0.23 or 1.1 per cent to S$20.68.

The steady growth of fee income, improvement in ROE and earnings recovery from lower credit costs could outweigh muted growth in net interest margins (NIM) and loans, in CGS-CIMB's view.

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All three banks beat expectations with their Q3 results, thanks to NIM for UOB, treasury income for DBS and lower credit costs for OCBC, said the analysts.

"The apparent trend in Q3 was that the quantum of impairment provisions had peaked in H1 2020," they wrote in a note on Saturday.

UOB lowered its credit cost guidance after the expiry of moratoriums in Malaysia and Thailand, given its more significant exposure to these countries.

Although DBS and OCBC kept their two-year credit cost estimates unchanged, both banks expect lower provisions in 2021.

This suggests that asset quality is not worsening, and the ample general provisions and macro overlays taken this year are sufficient to cover impending non-performing asset (NPA) formation, the analysts said.

All in, the brokerage expects the banks' credit costs to reduce by about S$491 million to S$1.8 billion, or 30-60 per cent year on year, in 2021, which will pave the way for a significant earnings recovery. "We do not rule out the potential for writebacks," it added.

Meanwhile, NIMs are likely to stabilise starting from the fourth quarter of this year as base rates bottom out, according to the analysts.

While they believe NIMs will remain under pressure going into 2021 as continued loan repricing transmits through the banks' loan books, the pace of margin compression should gradually taper.

"That said, we do not see scope for a rise in margins in the coming year. Any upside to margins could stem from shifts in the yield curve, or when the US Federal Reserve's fund rates start rising again," the analysts wrote.

Sustainable ROEs will be back in focus once book value fears evaporate, given that the trio has front-loaded on credit costs for this year, said Ms Choong and Ms Lim.

They expect DBS's ROE to improve to double digits - above 10 per cent - next year.

For OCBC and UOB, the analysts estimate ROEs will improve to about 9 per cent next year, from about 7-8 per cent. The two lenders will likely return to double-digit ROEs by 2023, the analysts added.

As the trio's capital ratios remain robust, CGS-CIMB expects a return of dividend payouts to pre-Covid-19 levels when the Monetary Authority of Singapore's (MAS) dividend cap is lifted.

The brokerage does not foresee the cap - set at 60 per cent of 2019's payout - will be extended beyond the current deadline of Q1 2021.

DBS's management has maintained that the scope for dividends to recover to pre-cap levels is intact, albeit not immediately upon the lifting of the restriction. CGS-CIMB forecast Singapore's biggest bank to announce dividends per share of about S$1.08 for 2021.

OCBC, meanwhile, is likely to report dividends per share of S$0.53 for next year, according to CGS-CIMB, which noted that the lender's capital build-up makes a case for dividend resumption.

As for UOB, the analysts noted that the modest loan growth and minimal credit migration should see its Common Equity Tier 1 ratio holding at 13-14 per cent, paving the way for resumption of 50 per cent dividend payout if MAS's cap is not extended beyond Q1 of next year.

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