Banking Sector - OCBC Investment 2018-06-13: Bank For Your Buck!

Banking Sector - OCBC Investment 2018-06-13: Bank For Your Buck! Singapore Banking Stocks DBS GROUP HOLDINGS LTD SGX:D05 UNITED OVERSEAS BANK LTD SGX:U11

Banking Sector - Bank For Your Buck!

  • Outlook is improving.
  • Banks are on strong footing.
  • DBS remains our pick.

Favorable operating conditions

  • Banking stocks have performed well this year, up some 9% YTD at the high, as measured by the FTSE ST Financial Index (FSTFN). While share prices have come off and the index is now off the year’s high of 1112.15 in May 2018, we believe that most of the positive drivers are still intact despite current equity market softness.
  • The outlook is definitely improving as the banking sector saw several quarters of improvement as allowances declined, NPLs plateaued and margins started to reverse up.

Healthy set of 1Q18 results

  • In general, quarterly profitability trends have also shown good improvements in the past few quarters.
  • For DBS, 1Q18 was also a record quarter for the group. This was similarly the case for the other banks, stripping out exceptional items. In terms of pretax profits, the 3 banks reported combined total profits of S$4.4b, the highest level historically. Net Interest Margins (NIMs) moved up to a range of 1.67% to 1.84% in 1Q18.
  • On average, this was the 5th quarter of improvement. Dividend payout trend has also been edging up in the last decade.

Recent weakness is opportune time to accumulate

  • At this year’s high, DBS share price was up 23% YTD, OCBC share price was up 13% and UOB share price was up 13%, which brought the 3 stocks to all-time historical highs. Since then, together with market softness, the banking stocks have also fallen in tandem.
  • We think that the recent price weakness, partly due to the lull period in May and June, could also be an opportune time to accumulate.
  • Our top pick in the sector is DBS.

Stock Price $ (12-Jun) P/BV (x) PER (x) Div Yield (%) FV ($) Upside (%) YTD (%) Rating
DBS 28.48 1.5 11 4.2% 34.60 21% 15% BUY
OCBC* 12.54 1.3 10 3.0% 14.74 18% 1% NR
UOB 27.86 1.3 10 3.6% 31.02 11% 5% BUY
1.4 11 3.6% 17% 7%
Sources: Bloomberg, OIR. OCBC numbers are based on Bloomberg consensus

Carmen Lee OCBC Investment | https://www.iocbc.com/ 2018-06-13
SGX Stock Analyst Report BUY Maintain BUY 34.600 Same 34.600
BUY Maintain BUY 31.020 Same 31.020