Brokers' take: Jefferies downgrades DBS, OCBC, UOB to 'hold' on flattening yield curve
JEFFERIES has downgraded its call on the 3 Singapore banks, DBS, OCBC and UOB , to "hold" from "buy", to account for a flattening yield curve and the muted transmission of the US Federal Reserve's rate hikes on local rate benchmarks.
Jefferies equity analyst Krishna Guha also cut his target prices for all 3 lenders in a report on Thursday (Mar 31): he lowered DBS to S$32 from S$36, OCBC to S$12.50 from S$13.10 and UOB to S$32 from S$33.50.
He expects the risk-reward profiles of the banks are now balanced, with share prices having risen by 10 to 20 per cent year-to-date, and sector forward multiples currently above their historical averages.
As at 3.40 pm on Friday, shares of DBS were down S$0.12 or 0.3 per cent at S$35.71, OCBC was up S$0.01 or 0.1 per cent at S$12.39, while UOB was down S$0.02 or 0.1 per cent at S$32.
Guha noted that the 3-month Singapore Overnight Rate Average (Sora) has yet to price in the Fed rate hike, and given that loans will be priced off the Sora benchmark eventually, if the muted pass continues, it may weigh on margins.
The analyst also lowered loan growth estimates and factored in high costs across the 3 banks, amid a looming threat of stagflation. He noted that loan statistics for February suggest that loan growth will likely be slow for the year, with consumers "losing steam".
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Guha added that sporadic volatility may limit market participation and dampen non-interest income growth, while rising oil prices may create room for writebacks.
Breaking down his analysis for each lender, Guha said as DBS has historically relied on non-interest income during the low rate periods, sluggish and sporadic volatility may negatively impact market-linked revenues.
Meanwhile, sluggish markets and widening spreads may negatively impact mark-to-market gains for OCBC's insurance business and trading income.
As for UOB, widening credit spreads and its exposure to small and medium-sized enterprises may pose asset quality risks and drag on capital ratios.
READ MORE:
- BT Explains: Stagflation and why it occurs
- Singapore investment banking fees drop 15.6% to US$221.3m in Q1: Refinitiv
- Singapore banks optimistic on economic recovery, rate hikes
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