Brokers' take: DBS expects Singapore banks to benefit from rate-hike cycle, maintains 'buy' on UOB, OCBC

DBS Group Research has maintained "buy" on UOB and OCBC at target prices of S$31 and S$14 respectively, as it expects Singapore banks to benefit from the rate-hike cycle.

The stance comes as DBS economists now expect Fed rate hikes to be delivered earlier, with 2 rate hikes in the second half of 2022, if the economic momentum is maintained, followed by another 2 rate hikes in early 2023.

With that, DBS analyst Lim Rui Wen, in an industry focus report dated Nov 30, pointed to upsides to the banks' net interest margin (NIM) and earnings as soon as H2 FY2022, should the banks start to reprice loans on higher benchmark rates.

As reference, she noted that DBS's own management has guided for S$1.8 billion to S$2 billion of incremental net interest income for every 100 basis points (bps) of rate hike.

In reiterating "buy" on UOB and OCBC, Lim also remarked that the banks' current valuations of 1 time their FY2022 price-to-book estimates are "inexpensive".

Besides, Singapore banks are favoured across Asean banks due to their high earnings visibility, dividend yields, and certainty of firm earnings and return-on-equity recovery, she added.

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Besides being Fed hike beneficiaries, Singapore banks can look forward to a potential writeback of provisions in FY2022, with every 10 bps decline in credit costs possibly providing a 5 to 6 per cent earnings upside in the period, Lim said.

Higher dividends could be a potential catalyst, said Lim, who is anticipating "further upside in dividends" in FY2022 due to the banks' strong capital levels, which are above the management's comfortable operating range.

Assuming a Common Equity Tier 1 comfortable operating range of 13 to 13.5 per cent, OCBC's excess capital is estimated to stand at S$4.6 billion to S$5.7 billion, or more than S$1 per share, while UOB's is estimated to be up to S$1.3 billion, or up to S$0.70 per share, she stated.

Notwithstanding that, she said key risks to investing in the banks include a slower-than-expected economic recovery, resurgence of pandemic cases and lockdowns, higher-than-expected credit costs, and later-than-expected Fed hikes.

There are, however, some bright spots for 2022, as she expects sustainability related, renewable energy, data centre, healthcare, and logistics fields to continue providing areas of loan growth.

Robust new mortgage bookings over FY2021 will also serve as a good pipeline for future drawdowns in FY2022, she said, further noting that UOB management also believes that regional loan growth will see increased traction in the future.

Meanwhile, the banks' non-interest income will continue to support the banks' top line, she added, noting that fee income at DBS, OCBC and UOB has grown at a compound annual growth rate of 7 per cent, 5.2 per cent and 0.8 per cent respectively in the past 5 years.

In FY2022, Lim projects a 10 per cent year-on-year growth in the banks' fee income, with wealth management fees contributing as a key driver of the segment.

Trading income, which continued to be mixed across the banks, will be a "wild card" in this segment, Lim said.

DBS in H1 FY2021 recorded a net trading income of S$1.04 billion and net income from investment securities of S$310 million, up 38 per cent and down 53 per cent respectively (see amendment note) from the same period in the previous year.

OCBC’s trading income in the first 9 months of FY2020 stood at S$611 million, up 2 per cent from the same period in the previous year, while its net income from investment securities stood S$200 million, down 16 per cent year on year. 

UOB’s trading and investment income for 9M FY2020 was S$620 million, down 15 per cent year on year.

As at noon on Tuesday (Nov 30), shares of UOB were trading at S$26.19, down 1.3 per cent or S$0.34, while OCBC shares were trading at S$11.26, down 0.7 per cent or S$0.08.

DBS shares were trading at S$30.60, down 0.6 per cent or S$0.19.

Amendment note: An earlier version of this article incorrectly stated that DBS' net income from investment securities in H1 FY2021 grew 58 per cent due to a source error.