Daiwa: Singapore banks remain a haven despite 4Q18 earnings misses

OCBC, Citibank, DBS and UOB ATMs at Tang Plaza at Orchard Road in Singapore.OCBC, Citibank, DBS and UOB ATMs at Tang Plaza at Orchard Road in Singapore.

Despite Singapore banks’ fourth-quarter earnings missing forecasts, the shares remain a “store of value” amid economic uncertainty this year, Daiwa said in a note on Monday.

The investment bank pointed to the banks’ “respectable” underlying earnings per share (EPS) growth, undemanding valuations and attractive dividend yields.

While fourth-quarter results were disappointing, the three banks still delivered core EPS growth of 8-28 percent on-year for 2018 and paid out higher dividends at average annual yields of 5 percent or higher, the note said.

In addition, 12-month forward price-to-earnings and price-to-book ratios are at or below their post-Global Financial Crisis averages, Daiwa said.

The investment bank shook up its pecking order a bit, saying UOB is now its top pick, supplanting DBS, with OCBC remaining the least preferred.


It kept an Outperform call on UOB and tweaked its target price to S$27.30 from S$27.20.

“We believe UOB is attractive on valuations, dividend yield and its appeal as a defensive play in the Singapore banks sector (for its purer commercial-bank exposure vs. its peers and mass-affluent exposure [vs. ultra-high net worth] in the wealth management segment),” Daiwa said.

UOB also has less Greater China exposure than its peers, at 9 percent of 2018 pre-tax profit, compared with 19-25 percent for DBS and OCBC, the note said.

“Consequently, we would expect UOB’s earnings to more resilient to any downside risks in the Chinese economy. Moreover, UOB could also
be one of the banks best positioned to capture financing opportunities of any secular supply-chain shift from China to Southeast Asia as 80 percent of its 2018 pre-tax profits already come from ASEAN,” or the Association of Southeast Asian Nations, Daiwa said.


Despite losing its top-pick crown, Daiwa remained positive on DBS, nudging up its target price to S$26.60 from S$26.50 and keeping an Outperform call.

“Its investment appeal as the bank with clearer dividends and better ROEs vs. its peers has not diminished. In fact, we believe this appeal may have strengthened after its fourth quarter of 2018 results announcement,” Daiwa said. ROE stands for return on equity.

“However, with a more diminished outlook for interest-rate increases and possibly loan growth, EPS growth rates will likely be more subdued and any sudden collapse in local interest rates (SIBOR and SOR) would have a more negative impact on DBS’s net interest margins than its peers’ due to its considerable current and savings account (CASA) based in Singapore,” it added.


When it comes to its third ranked pick, OCBC, Daiwa said it saw “no reason to be nervous,” as its fourth-quarter earnings miss appeared to be one-off in nature across insurance trading income and loan-related allowances.

It kept an Outperform call, but trimmed its target rice to S$11.90 from S$12.20.

“We believe the knee-jerk selldown of its shares after the fourth quarter of 2018 results announcement is likely to reverse in subsequent quarters on market-related recovery and demonstrated sustainable growth in its core banking operations,” Daiwa said.

Shares of OCBC ended Wednesday up 0.18 percent at S$11.22, while DBS slipped 0.28 percent to S$25.36 and UOB shed 0.20 percent to S$25.10.

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