Broker's take: Maybank KE positive on Singapore, Thai banks; remains 'neutral' on Indonesia banks

MAYBANK Kim Eng (MKE) has upgraded its sector outlook on Singapore banks to "positive", while maintaining its recommendations on Thailand and Indonesia banks to "positive" and "neutral" respectively.

In a research note on Singapore banks, the brokerage noted that its "negative" call in November has not worked, given "strong market liquidity and expectations for more stimulus".

"This momentum is likely to continue, buoyed by continued economic relaxing, targeted support for the vulnerable sectors and higher non-interest income due to market volatility," wrote analyst Thilan Wickramasinghe.

In addition, China's forecast-beating Q4 expansion, strong rebounds in US banking results and a steepening yield curve offer positive read-throughs for Singapore banks, MKE said.

It added that stronger gross domestic product growth expectations regionally should support a rebound in loan growth momentum, and forecasts loans to expand 7 per cent year on year in 2021. Low policy rates could also support further fee income growth, particularly in wealth and fund management, while volatility may add to trading income upside, the brokerage said.

Taking a cue from Organisation for Economic Co-operation and Development (OECD) banking regulators, MKE is of the view that dividend caps could see gradual easing in 2021 and estimates caps to be relaxed to 80 per cent of 2019 levels.

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"While our earnings per share forecasts are unchanged pending Q4 results in February, the flush liquidity environment and stimulus expectations have us lowering cost of equity assumptions for the sector by 100-130 basis points," it said.

As such, the brokerage has raised its target price (TP) on DBS to S$29.78 from S$24.63, and likewise raised its TP on OCBC to S$12.24, up from S$9.29. Noting that the banks' larger exposure to North Asia should be a positive catalyst for an earlier recovery, MKE has upgraded its recommendations for DBS and OCBC to "buy" from "sell" previously.

It has also upgraded its call on UOB to "hold" from "sell", and raised its TP on the lender to S$25.57, up from S$21.24.

As at 2.52pm on Thursday, DBS shares were trading at S$25.47, down S$0.34 or 1.3 per cent, while OCBC slipped S$0.13 or 1.2 per cent to S$10.42. UOB was also down amid broad market declines on Thursday, retreating S$0.30 or 1.3 per cent to S$23.34.

As for the banks in Thailand, MKE noted that their earnings will gradually improve from the second half of the year, as net interest margin and credit cost should bottom out in H1 2021. An economic recovery should be more visible in 2022, driven by vaccination and cross-border travel, noted analyst Jesada Techahusdin.

MKE's top picks include Kasikornbank, citing it as a prime beneficiary of economic recovery, and Tisco Financial Group, for its "high earnings visibility, solid balance sheet and decent yield".

Meanwhile, the return on equity for Indonesia banks has been widely expected to drop to an average of 9 per cent, given the "weak credit demand, high proportion of loan restructuring and rising non-performing loans", MKE noted.

"We see the most attractive buying opportunity in Bank Negara Indonesia (BBNI) as the bank is trading at a discount to its fair value… Among our coverage, BBNI has the most room for earnings recovery this year, assuming an improvement in loan quality," said analyst Rahmi Marina.

The brokerage has a "buy" recommendation on the counter, along with a TP of 7,500 Indonesian rupiah.