Brokers' take: Jefferies raises OCBC to 'buy', sees earnings, dividend cushion for trio

JEFFERIES Research on Wednesday upgraded OCBC to "buy" amid the recent sell-down on Singapore banks, arguing as well that the local trio have historically resilient earnings and dividend cushion.

This comes too as dividend yields for the trio hit levels not seen since the global financial crisis (GFC) in 2009, analysts said.

Singapore banks fell on Wednesday, losing more than 2 per cent. DBS closed down 48 Singapore cents to S$21.01, OCBC fell 22 Singapore cents to S$9.50, and UOB lost 57 Singapore cents to S$21.37.

Still, since the GFC, Singapore banks have shown the best combination of book value growth-volatility among its regional peers, and is second only to Indonesian banks in terms of local currency earnings, said Jefferies analyst Krishna Guha.

OCBC and UOB are trading at about 0.92 and 0.9 times price-to-book respectively - near trough valuation on a price-to-book basis - particularly after shares of all three banks tumbled on Monday.

"The results reaffirm the resilient and stable nature of earnings which in turn is reflective of multiple earnings lever, buffers to mitigate asset quality deterioration and healthy capital position," said Mr Guha.

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Jefferies is expecting lower margins of 4 to 8 basis points (bps) for Singapore banks following the recent and surprise Fed rate cut of 50 bps, as well as Jefferies' expectation of another 50 bps cut.

Based on lower margin estimates, Jefferies has cut 2020 earnings forecast by 4.4 per cent for DBS, 1.6 per cent for UOB, and 1.4 per cent for OCBC.

"While lower rates and ample liquidity may provide upside risk, recent oil price volatility may delay any expected recovery. While our concern on mergers and acquisitions overhang and excess capital still hold, we think the valuation of OCBC discounts those risks," said Mr Guha.

He has a "buy" call on DBS, and a "hold" rating on UOB. While valuation for UOB is attractive, Mr Guha's key concern is with UOB's growth in Greater China and management's guidance on realigning its exposure.

Mr Guha also estimates a dividend yield of 6.24 per cent for the trio in 2020, adding that the Common Equity Tier 1 (CET1) ratio in the upper range of 12.5 per cent to 13.5 per cent "provides comfort". The CET1 ratio refers to the bank's core equity capital against risk-weighted assets.

While Mr Guha said recent oil price volatility might delay any expected recovery, UOB Kay Hian said in a report that banks have whittled down their exposures to the oil-and-gas sector through recoveries and write-offs.

"The remaining exposures have weathered volatilities in crude oil prices over the past five years. Additional provisions are limited by significant mark down in valuation of collaterals," UOB Kay Hian said in a report on Wednesday.

UOB Kay Hian similarly noted that dividend yields for the trio are at about 6 per cent - a level not breached since the GFC in 2009 - following the recent share price decline.

"We expect dividend payouts for Singapore banks to be sustainable due to strong CET1 capital adequacy ratio. The banks also have the option to turn on their scrip dividend scheme should regional economies slip into a recession," said UOB Kay Hian.

Over the past 30 years, DBS and OCBC had hit levels above 6 per cent once during the GFC, and UOB twice during the GFC and Asian financial crisis in 1997.

"A steep share price correction that causes dividend yield to overshoot to 6 per cent tends to be followed by a sharp rebound," said UOB Kay Hian. The brokerage has maintained its "overweight" call on Singapore banks.