Hot stock: DBS shares tumble 2% following Citi downgrade; UOB, OCBC also slide more than 1%

DBS shares declined 2 per cent, or S$0.53, as at 3.13pm following Citi Investment Research's downgrade of its shares to "neutral" from "buy" on Monday.

Citi lowered DBS's target price to S$27 from S$31.10 due to the lender's exposure to China amid uncertainties over a US-China trade deal.

The US increased tariffs on US$200 billion of Chinese imports from 10 to 25 per cent on Friday, with Citi economists saying a trade deal could "come as soon as after scheduled trade talks end on May 10 and as late as into 2020 or beyond".

The research unit said DBS is the most exposed of its peers to the China market - 29 per cent of its fiscal 2018 profit before tax, compared to OCBC at 19 per cent and UOB at 9 per cent.

The lender might be impacted by market risks, potential interest cuts such as Fed rate cuts and yield curves flattening, and potential credit costs. The report said DBS might also hold onto more capital reserves and pay less dividends.

It downgraded DBS to "hold" instead of "sell" to reflect an "assumed lengthy period of uncertainty", during which China is likely to use necessary measures to stabilise and support growth, but "the immediate earnings risks to DBS are markets driven".

Should there be a full-blown trade war, Citi said it warrants further downgrades from an economic perspective, including higher credit costs, but the research unit does not envisage a cut in the present S$1.20 dividend per share or 4.5 per cent yield given a strong March19 Common Equity Tier 1 (CET1) ratio of 14.1 per cent.

On the other hand, a favourable trade resolution could quickly restore market sentiment and cause positive earnings surprises, driving a quick stock re-rating.

Citi expects Singapore banks' shares to be "range bound" for as long as the US-China trade uncertainties persist, given how sensitive their earnings are to markets sentiment and Greater China exposure. The pecking order of sensitivity and vulnerability from lowest to highest is UOB, OCBC, DBS, which is also the research unit's stock pecking order until the uncertainties resolve and a clearer direction emerges.

Overall, its key concerns are China macro data trends, markets volatility and Singapore property measures (leading to slower loan growth).

Citi's report comes after an end-April report from OCBC Investment Research which also downgraded DBS to "hold" with a fair value of S$29.18.

In another hit for bank stocks, Phillip Capital also downgraded OCBC shares from "buy" to "accumulate" on Monday, with a lower target price of S$12.70 from S$13.70 previously. Phillip Capital said the lower target price was mainly due to an increase in its credit cost forecast for fiscal 2019 from 14 basis points (bps) to 22 bps.

Phillip Capital's report on Monday also cited local housing loan contraction as a negative for OCBC.

In an overall retreat by the Straits Times Index on Monday, all three local banks' shares faced heavy selloffs. UOB shares were down 1.45 per cent, or S$0.37, at S$25.24, while OCBC shares were down 1.76 per cent, or S$0.20, at S$11.19 as at 3.13pm.