Singapore Banks - Time For A Pause; Downgrade DBS To HOLD
- Although the Fed fund futures are now pricing in the policy rate peaking at ~5% by mid-2023 (vs. Singapore banks’ base case assumptions of ~4.75%), the Fed’s signalling of a slower pace of rate hikes going forward limit the scope of further earnings upgrades for SG banks, in our view.
- In the event the Fed raises its rates to ~5% by mid-2023 and holds these rates steady into FY24F (vs. the ~4.5% exit rate we factored in for FY24F), our sensitivity analysis finds that SG banks’ earnings per share (EPS) could rise by 3-7% in FY23-24F.
- While we still expect sequential margin expansion over 4Q22-2Q23F, we think that Singapore banks’ valuations may start easing as the quantum of expansion slows from rising funding costs. On balance, Singapore banks are guiding for absolute NIMs to peak in 1Q-2Q23F, implying a further ~30bp (cumulative) expansion from 3Q22.
- Although our stress test of household balances found that retail borrowers may hold up well against ~4.5% mortgage rates (see report Singapore Banks - CGS-CIMB Research 2022-09-30: Turning It Up), weakening borrower affordability remains a key risk for the sector. That said, banks’ management teams have not revealed concerns on this front as yet.
- Credit cost expectations across the banks are in the range of 15-20bp for FY23F, supported by benign asset quality and ~S$500m-2bn in general provision management overlays (implying 0.2-0.5% of gross loans). That said, we believe risks are tilted to the downside in the event of weaker business sentiment affecting borrower repayment capabilities, resulting in credit costs above the 15-20bp factored into our FY23F estimates.
- We highlight that higher interest rates also add to the risk of slowing credit growth. Bank management teams have preemptively cautioned investors about upcoming slower credit growth. We have factored in 4-5% y-o-y growth in FY23F (vs. 5-7% forecast y-o-y growth for FY22F).
- We downgrade Singapore banking sector to NEUTRAL (from OVERWEIGHT) as softer US inflation prints provide a firmer argument for the Fed to slow the pace of its rate hikes. Strong CET1 and 4-5% dividend yields provide key baseline support for the sector.
- We also downgrade DBS (SGX:D05) to HOLD with a lower GGM-based target price of S$36.50 on lower terminal growth and sustainable ROE assumptions, as additional margin upside is likely capped as rate hikes are slowed and eventually paused. DBS’s valuation is also richer vs peers, at ~1.3x FY23F P/B (vs. peers’ ~1x FY23F P/B). See report: DBS Group - CGS-CIMB Research 2022-12-06: Upside Likely Capped By Fed Rate Hike Pause.
- UOB (SGX:U11) is our top pick for its more attractive valuations (~1x FY23F P/B). The integration of Citi’s portfolio is a key re-rating catalyst for ~14% ROE in FY24F.
Above is the excerpt from research report by CGS-CIMB.
Clients of CGS-CIMB may access the full report in PDF @ https://www.itradecimb.com.sg/.
Andrea CHOONG CGS-CIMB Research | LIM Siew Khee CGS-CIMB Research | https://www.cgs-cimb.com 2022-12-06 2022-12-06
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Analyst Reports on Singapore Banking & Finance Sector