CGS-CIMB downgrades Singapore banks on ‘harder days ahead’

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.

CGS-CIMB downgraded Singapore’s bank sector to Neutral from Overweight, on expectations of “harder days ahead” for UOB, OCBC and DBS.

“The three local banks had an extremely strong first quarter of 2019, led by buoyant capital market, chalking in record trading income. In fact, it was the only sector that beat our expectations,” CGS-CIMB said in a note Tuesday. “It would be difficult to repeat this in the second quarter, in our view.”

The banks could face an “upward battle” to increase their net interest margins, or the difference between the interest rate banks charge to lend and their cost of funds, as the effects of repricing mortgage rates higher begins to taper and as the yield curve flattens, the brokerage said.

It pointed to the risk of interest rate cuts ahead. The U.S. Federal Reserve has signaled a more dovish stance on interest rates ahead.

At the same time, the property cooling measures in Singapore continue to weigh on new mortgages, and the escalating trade war could slow loan growth as large companies take a wait-and-see approach, CGS-CIMB said.

The brokerage removed DBS from its “most preferred” stock list due to expensive valuations, and replaced it with UOB.

“Although OCBC appeared to withstand better in terms of share price performance vs. DBS and UOB, we think UOB is best-placed to benefit from a shift in supply chains out of Greater China into ASEAN,” the note said.

“We think an escalation in U.S.-China trade war retaliations could affect DBS the most given its 30 percent loan book exposure to Greater China/Hong Kong (highest amongst Singapore banks),” it added.

For Singapore’s overall market, the brokerage tipped sticking with liquid and large-cap plays.

“We believe the uncertain external front will weigh on Singapore’s growth outlook and corporate earnings ahead, with risks for earnings cuts prevailing in almost all sectors, other than healthcare, property and tech,” the note said.

It set a Straits Times Index target of 3275, up from 3110 previously, but added expectations the index may fall ahead mean 3150 may be a better time to enter the market. The new target assumes some progress on trade talks after June, it said, but noted a full-blown trade war will weigh the index if global economic growth slows.

The STI was up 0.24 percent at 3190.76 at 11:58 A.M. SGT.

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