Nomura upgrades OCBC to Buy, sticks with Overweight call on Singapore banks

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.

Nomura upgraded OCBC to Buy from Neutral after the share’s recent correction, as the investment bank stuck with an Overweight call on Singapore’s banks, saying their below-peers’ valuations can’t be justified.

“U.S.-China trade tensions have affected all APAC banks, but markets seem to be overly punishing Singapore banks,” the investment bank said in a note on Wednesday.

In addition, while all three Singapore banks missed their earnings forecasts, that wasn’t unique to the city-state’s banks, with consensus forecasts for Asia-Pacific developed market banks also seeing cuts, Nomura said.

The Singapore banks’ price-to-book valuations are at a discount to Asia-Pacific developed market banks by an average of 4 percent, excluding DBS, while the discount to Southeast Asian banks’ was at 31 percent, Nomura said.

“We expect the market to recognize this mismatch and correct it,” it said, calling it an opportunity to accumulate the shares now.

“The market seems to be over-penalizing them post-4Q18’s earnings disappointment. In our view, the recent sell-off from 4Q18’s disappointing results and decline in valuations make the risk-reward highly attractive for Singapore banks,” Nomura said.

UOB top pick

Nomura tipped UOB as its top pick, saying its risk-reward was the most attractive and that the share should not be trading at such cheap valuations.

“We attribute the mispricing to the recent market sell-off on UOB after it missed fourth quarter of 2018 earnings,” the note said. “We do not expect this divergence to be sustained, and any catalysts (whether is it earnings or an ease in U.S.-China trade tensions) would send valuation significantly northward.”

But it cut its target price on UOB to S$31.50 form US$33.80, and lowered its 2019-20 profit after tax and minority interests (PATMI) forecasts by 7.7 percent and 8.3 percent respectively, mainly on lower trading income revenue.

Upgrades OCBC

It upgraded OCBC to Buy from Neutral, and increased its target price to S$13.00 from S$12.50.

“Our upgrade on OCBC is largely to take advantage of the current mispricing of the bank, while valuations seem to be bottoming. We expect this bearish sentiment to ease in the first quarter of 2019, where the Street might upgrade OCBC’s forward earnings, as revenues are unlikely to be pressured by trading and insurance income,” it said.

“We would use any falls from here as an opportunity to accumulate further,” Nomura said.

Trims DBS target price

Nomura rates DBS at Buy, but trimmed its target price to S$29.50 from S$31.50. It said it expected DBS’ 2019 earnings would be less volatile than in 2018 as trading income as a percentage of total revenue was already at a low of 10 percent, with ANZ integration costs no longer an issue.

But it trimmed its PATMI forecasts for 2019-20 by 11.4 percent to 16.1 percent to take into account rising political risks and slower global economic growth.

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