Singapore banks upgraded to Overweight by RHB despite property cooling measures

POSB, OCBC, UOB and Citibank ATMs in Singapore.POSB, OCBC, UOB and Citibank ATMs in Singapore.

RHB upgraded Singapore’s banks to Overweight from Neutral on expectations that net interest margins (NIMs) will continue to widen, driving earnings, despite the fresh property cooling measures from the Singapore government.

“Whilst the U.S.-China trade war and the Singapore government’s property cooling measures could slow loan growth, rising [U.S.] federal funds rate and a firmer SIBOR will widen banks’ NIM,” RHB said in a note on Friday. SIBOR stands for the Singapore Interbank Offered Rate, which is a daily reference rate related to the interest rates that banks use to offer to lend funds to other banks.

“The recent share price correction has already factored in significant negatives from the Singapore government’s property cooling measures,” it added.

In early July, Singapore’s government announced a fresh round of cooling measures for the property market, targeting the additional buyer’s stamp duty (ABSD) and loan-to-value limits. The surprise measures set off a selloff in property stocks and banks.

RHB said that the cooling measures could dampen housing loan growth ahead, but it was still forecasting mid-to-high single digit loan growth each year over 2018-20. It noted that loan growth in the first quarter of 2018 was mainly driven by non-housing loans for the three banks, with housing loan growth averaging 0.9 percent on-quarter, compared with an average 2.5 percent for overall loans.

Additionally, it said its sensitivity analysis indicated that a 1 percentage point slowdown in loan growth would be offset by a 10 basis point rise in the SIBOR.

“The impact of the Singapore government’s property cooling measures would be offset by the expected increases in the SIBOR over the next few quarters,” it said.

It forecast that DBS and UOB, its top two sector stock picks, would record average NIMs of 1.96 percent in 2020, well above the first quarter’s average of 1.84 percent, on expectations of further hikes in the U.S. federal funds rate and in SIBOR.

It tipped UOB as its preferred pick, rating it Buy with a S$33.30 target price, pointing to expectations that management could raise dividends ahead.

RHB added that DBS was also “attractive,” rating it at Buy with a target of S$30.30.

“Whilst the ongoing trade war between the U.S. and China could slow DBS’ loan growth (more than peers), we believe the rise in the SIBOR could offset the negatives,” it said.

Shares of UOB ended Friday down 0.49 percent at S$26.55, while DBS was up 0.96 percent at S$26.25.


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