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Broker's Calls
Uma Devi 8/06/2020, 1:09pm
SINGAPORE (June 8): As the Covid-19 pandemic drags on, Singapore has moved into Phase One of its much-awaited economic reopening. Yet, the outlook for local banks remains uncertain.

Phillip Capital analyst Tay Wee Kuang has downgraded Singapore’s big three banks - SGX: D05 DBS Group Holdings Ltd, SGX: O39 Oversea-Chinese Banking Corp. Limited and SGX: U11 United Overseas Bank Ltd - to “neutral” from the previous “accumulate” with respective target prices of $20.60, $9.14 and $20.70.

“Underlying estimates remain intact but the recent price movement has resulted in the downgrade of the banks,” says Tay in a Monday report.

He notes that local banks have taken to slashing local deposit rates in a bid to manage pressure on net interest margins (NIMs). For instance, OCBC has halved interest rates on high-interest accounts from 1.2% on the first S$35,000 and 2.4% on the next S$35,000 to 0.6% and 1.2% respectively with effect from July 1. Bonus interest amounts of 0.2% and 0.4% on the first and next $35,000 were also removed.

“Similar moves were made by DBS and UOB to manage funding costs on their high interest accounts – the DBS Multiplier account as well as the UOB One account – respectively,” notes Tay.

Local lending rates continued their declines, with the three month Singapore Interbank Offered Rates (Sibor) and Swap Offer Rate (SOR) falling to as low as 0.55% and 0.16% respectively in May.

Tay says the current Sibor and SOR levels represent a decline of 99 and 109 basis points respectively from 1Q2020 averages of 1.55% and 1.29%.

Domestic loans, too, suffered as growth dipped to 1.98% y-o-y. This came in below the brokerage’s expected range of 2-3%. Segmentally, while business loans grew 5.36% in April, customer loans shrank 3.28%, marking the steepest decline since consumer loans started shrinking in April 2019.

Particularly, Tay hones in on credit card loans which tumbled 13.1% y-o-y, signalling poorer consumer sentiments which could potentially continue to weigh on the performance of consumer loans.

However, Tay identifies a bright spot for banks as the securities daily average value grew 34% from the previous year to $1.477 million in May.

“However, part of the growth was attributed to the rebalancing of MSCI Singapore Index at the end of the month,” cautions Tay.

“Removing the spike as a result of the rebalancing will see SDAV growing by 22% YoY, a slower but robust growth,” he adds.

In addition, the volatility index averaged 30.9 for May, denoting a decline for the second consecutive month as the reopening of economies turned markets positive.

While Tay says derivatives daily average volume (DDAV) is likely to come under pressure in May, this could be bolstered by short term trading volumes as clients begin “unwinding their positions” after the Singapore Exchange (SGX) announced the partial cessation of its MSCI licensing.

“Based on open positions at the end of April, there were 670k open positions or 37% of all open positions, that will be affected by the cessation of licensing agreement with MSCI,” says Tay.

While Tay acknowledges that the cessation of licensing agreement will lead to lower trading and clearing revenue due to reduced trading volumes as well as lower treasury fees from lesser open market positions, he remains bullish on SGX’s longer term position.

“SGX will be able to deepen partnerships with existing index partners such as FTSE to launch replacement products,” says Tay.

“FTSE currently provides SGX with its China A50 index futures, which makes up close to half of SGX’s total derivatives volume in April,” he adds.

As far as Singapore banks are concerned, Tay feels that the recent run-up in prices may have underestimated some underlying risks arising from near term heightened credit costs.

“No changes have been made to our underlying estimates,” says Tay, adding that the yield for the three banks remains “attractive” at 5%.

As at 12.30pm, shares in DBS are trading 42 cents higher, or 1.9% up, at $22.70, while shares in OCBC are trading 19 cents higher, or 2% up at $9.63. Meanwhile, shares in UOB are trading 48 cents higher, or 2.2% up, at $22.48.

https://www.theedgesingapore.com/capital/brokers-calls/phillip-capital-downgrades-all-3-local-banks-neutral-uncertain-outlook
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