Singapore banks downgraded in Daiwa’s Singapore strategy

OCBC, DBS, UOB and Citibank ATMs at Tang Plaza in Singapore; taken September 2018.OCBC, DBS, UOB and Citibank ATMs at Tang Plaza in Singapore; taken September 2018.

Daiwa downgraded Singapore banks to Neutral from Overweight and deleted DBS from its portfolio as the investment bank positioned away from rate-sensitive plays.

It pointed to the U.S. Federal Reserve’s recent signalling that it would hit the pause button on its interest rate hiking cycle.

“We fear banks’ performance could be vulnerable to fund outflows, as the sector has been the key recipient of inflows from institutional funds over the past few years,” Daiwa said in a note on Thursday.

It noted institutional funds have sent S$3.1 billion into the bank stocks over the past three years.

“We fear the boat has titled too far to one side and any reversal of fund flows could accentuate the underlying price movements with the sector,” Daiwa said.

In addition, analysts in general have been cutting banks’ earnings forecasts for the past few months, it said.

That spurred the removal of DBS from the top picks list.

“At the individual bank level, DBS has the greatest sensitivity to the level of SIBOR rates due to its current and savings account (CASA) deposit base in Singapore,” it said. It pointed to a “strong correlation” between SIBOR and the U.S. Federal Funds rate.

But it kept UOB in the portfolio as the banks are index heavyweights and UOB is well-capitalized and the bank thinks it offers the greatest capacity to pay higher dividends and also has the least exposure to Greater China.

Cutting STI target

Concerns over interest rates also spurred, in part, Daiwa’s cut to its Straits Times Index target for end-2019 to 3330, down from a mid-2019 target of 3485.

To compensate for cutting the bank outlook, it upgraded consumer goods to Overweight from Neutral, particularly on a more positive outlook for crude palm oil (CPO) prices.

“The removal of levies in Indonesia and reduction of import duties in India have been supportive of CPO prices recently, leading us to add Wilmar and First Resources to our top picks list,” Daiwa said.

“While we remain concerned about a potential oversupply situation in the CPO market, Wilmar as a stock looks well-positioned given its exposure to the downstream segment, positive earnings revision trends, and possible listing of its China business,” it added.

It also said it preferred adding telecoms to the Singapore REITs, as it estimated the telecoms offer better dividend yields. It added NetLink NBN Trust to its picks as it offered a slightly higher yield spread of 3.6 percentage points than the REITs’ average.

Overall, Daiwa remained Neutral on property developers as the sector has rebounded from lows, but it kept a preference for City Developments.

“Singtel and CapitaLand Mall Trust (yield), Thai Beverage (election play), Dairy Farm (diversified consumer), ST Engineering and SATS (aviation growth) round up our other index picks,” it said.

“For our out-of-index picks, we are deleting Health Management International (HMI) due to its poor second quarter FY19 results, while retaining Raffles Medical (regional healthcare play),” it added.

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