DBS could be most susceptible to rate cuts amid slowing sector outlook: CGS-CIMB

SIGNS of a potential slowdown in the Federal Reserve’s pace of its rate hikes have led CGS-CIMB to downgrade its sector call to “neutral” from “overweight”.

Although the research house thinks sector net interest margin (NIM) expansion is likely to continue in FY2023, it sees limited scope for further upward earnings revisions as rate hikes pause.

CGS-CIMB said DBS could be the most susceptible to rate cuts among its peers, as incremental margin expansion has been priced in for the stock at this stage.

Its call on the bank has been downgraded to “hold” from “add” on richer valuations, given how DBS is currently trading at 1.3 times FY2023 price-to-book value (P/BV) versus its peers’ ratio of about one time.

The bank’s target price has been cut to S$36.50 from S$38.75 to account for a lower terminal growth assumption.

“Although DBS is a key beneficiary of rising rates given its robust funding profile, progressively higher funding costs should nonetheless affect the quantum of NIM,” commented CGS-CIMB in a report on Tuesday (Dec 6).

“We think there is limited scope for further earning upgrades (for DBS) to be driven by NIM expansion given our expectation of the Fed slowing down its pace of rate hikes towards a 5 per cent peak rate before taking a pause,” it added. 

On the other hand, the research house maintained its “add” calls on both OCBC and UOB with the respective target prices of S$13.70 and S$34.80.

The latter is highlighted as CGS-CIMB’s top sector pick for its more attractive valuations at a ratio of one time FY2023 P/BV, with the integration of Citi’s portfolio as a key re-rating catalyst for an estimated 14 per cent return on equity in FY2024.

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Sector-wise, CGS-CIMB predicted a narrower 4-5 per cent year-on-year credit growth in FY2023 versus its forecast 5-7 per cent growth for FY2022, considering how higher interest rates would add to the risk of a slowdown.

“While we still expect sequential margin expansion over Q4 FY2022 to Q2 FY2023, we think that banks’ valuations may start easing as the quantum of expansion slows from rising funding costs,” said CGS-CIMB. 

It added that weaker business sentiment would stand to affect overall borrower repayment capabilities, which may result in credit costs rising above the 15-20 basis points already factored into FY2023 sector estimates.