Brokers' take: UOB emerges as RHB's top pick among 'overweight' bank stocks
RHB maintained "overweight" on the trio of Singapore banks as it expects them to benefit from the imminent interest rate upcycle, with DBS looking to gain the most advantage out of the situation.
But instead of DBS, the brokerage has picked UOB as its top bank stock pick in its latest banking sector update released on Thursday (Dec 30).
RHB pointed out that its choice was down to UOB's growing fee income base in wealth management and loans, healthy asset quality with robust general provision buffers, and the resumption of a 50 per cent dividend payout ratio.
These were underscored in the bank's results for the first 9 months of the year, it noted.
RHB gave UOB a target price of S$33.50, which represents an upside of 23.8 per cent from its share price of S$27.05 as at Wednesday's close. The brokerage's target price for DBS, at S$40.40, comes with a slightly smaller upside of 23.2 per cent from its current price of S$32.78.
The valuation for UOB comes as RHB expects the bank's net profit to rise 9 per cent in FY2022, boosting its return on equity to 9.6 per cent.
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RHB added that its S$33.50 target price is based on the stock's intrinsic value of S$31, which is determined by its 1.2 times price-to-book value ratio derived from the Gordon growth model (GGM).
UOB's target price also takes in an 8 per cent discount which RHB had given the stock based on an environmental, social and governance (ESG) rating derived using the brokerage's proprietary ESG methodology.
DBS received the same discount as RHB ascribed it the same ESG score of 3.4. OCBC, which was given a S$15.10 target price with a 32 per cent upside, got only a 6 per cent ESG discount as RHB gave it an ESG score of 3.3.
As for DBS, RHB said structural changes brought about by the bank's digital transformation and new regional growth platforms will support richer valuations for its stock.
Its S$40.40 target price is based on an intrinsic value of S$37.39, determined using its GGM-derived price-to-book value ratio of 1.57 times, which is above 2 standard deviations from the historical mean.
Apart from the US Federal Reserve's hawkish pivot in December and the flagging of 3 rate hikes next year, RHB said the banks' key catalysts in 2022 include continued growths in loan demand and fee income.
The brokerage believes that the recently announced property cooling measures would not hold the banks back.
RHB said their near-term loan growth "would not be impacted" given that the progressive drawdown of mortgages sold and approved this year would support still-decent housing loan growth over the next 2 years.
While the cooling measures are expected to dampen purchases for investment purposes, the development may likely boost demand for wealth projects as investors look for alternatives, it added.
Meanwhile, RHB said there remains several risks to its investment view. They include an escalation of the Covid-19 situation, a sharper-than-expected slowdown in China hurting regional trade flows, and stronger-than-expected rise in inflation that may dampen business sentiment.
It added that the Omicron variant would likely cause a "short-term soft patch" in economic growth early next year. But, with each new variant doing a little less damage than previous ones, it is of the opinion that expectations for stronger economic growth in 2022 should remain intact.
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