Brokers’ take: Maybank turns ‘neutral’ on Singapore banks with DBS as top pick

MAYBANK Securities has downgraded its call on Singapore’s banks to “neutral” from “positive” as it thinks the sector’s risk-reward dynamics are now largely balanced, with limited upside catalysts and rising asset quality risks.

In a report last Friday (Mar 10), analyst Thilan Wickramasinghe flagged potentially accelerated Fed rate hikes along with the likelihood of recession in the US and Europe.

He anticipates a sharp deceleration in the pace of net interest margins in the year ahead, as funding competition could drive deposit costs higher.

For these reasons, Maybank’s “buy” ratings on UOB and OCBC have been downgraded to “hold”. DBS remains the research house’s only “buy” pick although the target prices of all three banks have been lowered.

UOB’s target was cut to S$31.73 from S$33.77 to account for the slowing growth, potentially higher credit costs, and expectations of rising non-performing loan (NPL) risks.

In particular, Wickramasinghe sees significant risk in slowing global growth as this could have a spillover impact on asset quality in Asean, which accounts for 70 per cent of UOB’s loan book.

Risks are “firmly on the downside”, according to the analyst, as he expects NPLs to peak at 1.8 per cent by FY2024.

Though the bank’s mass premium wealth segment could see a turnaround as the rate environment settles, motivating this segment towards increasing risk could take longer than the private wealth segments given the current attractive fixed deposits rates, he said.

Likewise, OCBC’s reduced target of S$13.58 from S$14.70 previously comes amid reduced earnings per share estimates for FY2023 to FY2024 with higher cost-of-equity projections.

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“The continued consolidation of (OCBC’s) insurance business with the group – where mark-to-market unpredictability is set to remain high – further increases earnings volatility relative to peers,” said Wickramasinghe.

The analyst also highlighted lower dividend visibility for the bank versus a quarter ago, given recent changes to its dividend policy.

DBS, on the other hand, remains Maybank’s top sector pick at “buy” for structurally higher return on equity compared to its peers.

Wickramasinghe thinks this could support a higher trading multiple going forward despite the possibility of tapering year-on-year growth. DBS’s strong provisioning, capital and high dividend yield could also provide some mitigation to asset quality risks in a high rate environment, he added.

Maybank’s price target on DBS was nonetheless lowered to S$39.12 from S$42.69 after the research house cut its FY2023 to FY2024 EPS estimates by 3 to 4 per cent to account for rising NPLs.

“On one hand, higher margins and potential return to growth of non-interest income should keep sector operating metrics resilient. Cost pressures driven by labour shortages should also ease, and digitisation-driven efficiencies are set to manifest going forward. These should support dividend sustainability (of banks in Singapore),” said Wickramasinghe of his overall sector view.

“However, this must be balanced with the critical known-unknown of deteriorating asset quality.”