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Singapore Banks - UOB Kay Hian 2021-03-16: Higher Bond Yields Are Here To Stay

Singapore Banks - UOB Kay Hian Research | SGinvestors.io DBS GROUP HOLDINGS LTD (SGX:D05) OVERSEA-CHINESE BANKING CORP (SGX:O39) UNITED OVERSEAS BANK LTD (SGX:U11)

Singapore Banks - Higher Bond Yields Are Here To Stay

  • We expect government bond yields to remain firm with an upward bias, supported by recovery in economic growth driven by fiscal stimulus and COVID-19 vaccinations. Higher bond yield is positive for banks as it foreshadows higher future interest rates. DBS and OCBC have strong CET-1 CAR of 13.9% and 15.2% respectively.
  • We expect DBS (SGX:D05) and OCBC (SGX:O39) to provide dividend yield of 3.9% and 4.3% for 2021 and 4.7% and 4.8% for 2022. Maintain OVERWEIGHT.



Surge in government bond yields on a worldwide basis.

  • The yield for 10-Year US government bonds has risen by 72bp year-to-date to 1.63% in Mar 21. On the other hand, the yield for 2-Year US government bonds hardly moved and edged marginally higher by 3bp year-to-date to 0.15%. The spread between the 10-Year and 2-Year US government bonds widened by 69bp year-to-date to 1.48%.
  • In Singapore, government bond yields have moved up in tandem as well. The yield for 10-Year Singapore government bonds rose by 71bp year-to-date to 1.55%, while the spread between the 10-Year and 2-Year Singapore government bonds expanded by 47bp year-to-date to 1.02% in Mar 21.


Higher bond yields are a reflection of rapid economic recovery.

  • US GDP is projected to expand by 5.5% in 2021 and 3.8% in 2022, driven by optimism over COVID-19 vaccinations and stimulus spending. US retail sales jumped 5.3% m-o-m on a seasonally-adjusted basis, boosted by stimulus cheques and easing of safe distancing measures in Jan 21. The job market bounced back with 379,000 jobs created in Feb 21.


Positive catalysts from fiscal stimulus and COVID-19 vaccinations.

  • US President Joe Biden has just signed the US$1.9t American Rescue Plan into law. This massive stimulus package is on top of the US$0.9t COVID-19 Relief Bill signed by ex-President ump in Dec 20. In aggregate, the two stimulus packages represent a sizeable 13% of US GDP.


COVID-19 vaccinations underway.

  • The US is currently administering 1.8m doses of COVID-19 vaccines per day. The number of people who have received COVID-19 vaccinations has hit 69mil or 21% of the total population.
  • Similarly, Singapore has stepped up COVID-19 vaccinations. 392,620 Singaporeans have received at least one dose of the COVID-19 vaccine (6.7% of population), of which 218,694 are fully vaccinated. The government targets to have 40 vaccination centres in operation and 1.25mil people vaccinated by end-Apr 21.


This time is “DIFFERENT”.

  • The pace of the Federal Reserve’s (FED) quantitative easing (QE) has accelerated (Global Financial Crisis: US$85b/month versus COVID-19 pandemic: US$120b/month). Money supply M2 expanded 25.9% y-o-y in Jan 21. We believe a potential pick-up in future inflation is a valid concern. As Milton Friedman said “Inflation is always and everywhere a monetary phenomenon.” Implied inflation based on 10-Year Treasury Inflation-Protected Securities (TIPS) has increased by 0.74ppt y-o-y to 2.23%.


Maintain OVERWEIGHT on Singapore Banks.

  • Economic conditions are likely to gradually improve in the next 12 to 18 months. We see 4 catalysts for Singapore Banks:
    1. Higher government bond yield and steepening yield curve. Banks are best positioned to benefit from higher bond yields as:
      1. they foreshadow higher future interest rates, and
      2. reduce competition from the bond markets as an alternative source of funding for corporate customers.
    2. Economic recovery powered by COVID-19 vaccination underway. Singapore’s vaccination programme is expected to be completed by 3Q21. Positive implications include:
      1. Improving business sentiment and confidence,
      2. easing of safe distancing measures, and
      3. reducing stress on the corporate sector, thus moderating NPL formation.
      • Banks, being cyclical stocks, will benefit from an economic recovery as consumer behaviour and domestic consumption normalises as mass vaccination continues.
    3. Moderation in credit costs. The expiry of the loan moratorium was smooth and orderly. DBS’s exposure to loans under moratorium has dwindled from 5.1% to 1.2% of total loans due to the expiry in Singapore and Hong Kong. DBS’s credit costs are expected to drop from 80bp (S$3.0b) in 2020 to 40bp (S$1.6b) in 2021. OCBC’s exposure to loans under moratorium has dropped from 9% to 4% of total loans (expiry in Malaysia) and further declined to 2% of total loans (expiry in Singapore). OCBC’s credit costs are expected to drop from 77bp (S$2.0b) in 2020 to 33bp (S$0.9b) in 2021.
    4. Willing and able to pay more dividends. DBS and OCBC have strong CET-1 CAR of 13.9% and 15.2% respectively in 4Q20, substantially higher than their target range of 12.5-13.5%. Thus, banks are well positioned to fully normalise dividend to their pre- COVID-19 levels.
  • We envisage a two-step process in normalisation of dividend payout back to their pre- COVID-19 levels. We expect DBS to pay S$0.30 per quarter in 2021 and S$0.33 per quarter in 2022. We expect OCBC to pay S$0.25 per half year in 2021 and S$0.28 per half year in 2022. MAS is expected to announce its guidance on dividends for Singapore banks in May-June.

DBS (SGX:D05)



OCBC (SGX:O39)






Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2021-03-16
SGX Stock Analyst Report HOLD MAINTAIN HOLD 30.30 UP 29.200
BUY MAINTAIN BUY 14.680 SAME 14.680
NOT RATED MAINTAIN NOT RATED 99998.000 SAME 99998.000



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