Singapore Banks - UOB Kay Hian 2021-05-31: The Trend Is Your Friend


Singapore Banks - The Trend Is Your Friend

  • Monetary policy has reached an inflexion point as G7 countries have experienced a rapid recovery from the COVID-19 pandemic. BOC and BOE have scaled down their bond purchase programmes as well.
  • We expect the transition in monetary policy from accommodation to tightening to trigger a re-rating for Singapore banks, pushing valuations toward upcycle levels.
  • BUY OCBC (SGX:O39) (Target Price: S$15.50), followed by DBS (SGX:D05) (Target Price: S$35.45).
  • Maintain OVERWEIGHT.


  • G7 countries have experienced rapid economic recovery and have started to unwind/scale down the ultra-accommodative monetary stimulus introduced to overcome the negative impact from the COVID-19 pandemic.

Canada the first to take away the punch bowl.

  • The Bank of Canada (BOC) is keeping its overnight rate at 0.25% but has scaled down its purchase of government bonds by 25% to C$3b per week at its April meeting, becoming the first G7 country to unwind quantitative easing. Housing construction is booming and the BOC is concerned about the rapid rise in home prices. It forecasts GDP growth of 6.5% in 2021 and 3.75% in 2022. It expects inflation to overshoot to 3% in mid-21 but ease to 2% in 2H21 and 2022.

The UK has followed suit.

  • The Bank of England (BOE) has kept its benchmark interest rate at 0.1% but scaled down its purchase of government bonds by 23% to £3.4b per week at its May meeting. Governor Andrew Bailey views the recent inflationary pressure to be transitory and sees no signs of inflation getting passed through to consumers. The BOE forecasts GDP growth of 7.25% in 2021, the fastest in more than 70 years. GDP is expected to return to pre-COVID-19 level in 4Q21. BOE could start raising interest rates in 2022.

First hint of the Fed moderating the pace of bond purchases.

  • The minutes of the Fed’s policy meeting in late-April revealed that some Fed officials intend to discuss plans to downsize its bond purchase programme in upcoming meetings. The Fed currently purchases US$120b of treasury and mortgage-backed securities per month. FOMC participants expect core personal consumption expenditure (PCE) inflation to overshoot to 2.2% in 2021 and ease to 2% in 2022 in their forecasts made in Mar 21. Core PCE inflation has hit 3.1% in Apr 21.
  • The pick-up in inflation is likely to be distorted by the base effect of weak inflation at the onset of COVID-19 pandemic during 1H20. However, some FOMC participants are concerned that inflationary pressure could build up to unwelcome levels.

US financial system flooded with excess cash.

  • Excess cash in the financial system has ballooned due to the Fed’s bond purchase programme, stimulus cheques from the federal government and limited supply of treasury bills. Banks and money market funds have parked a record US$480b of cash with the Fed under the reverse repurchase programme in May 21.
  • The financial system is flushed with excess cash but there are limited short-term financial instruments to absorb the cash. This has led to treasury bills with maturity of less than three months trading at negative yields.


Inflexion point for monetary policy.

  • The G7 countries and China are experiencing rapid recovery from the COVID-19 pandemic. Canada and the UK have started to taper quantitative easing. The US Fed has also started to evaluate plans to downsize its bond purchase programme. New Zealand, Norway and South Korea are even more hawkish and are looking to raise interest rates.
  • The Global Financial Crisis was followed by a 7-year period of zero interest rates. We believe the runway for zero interest is much shorter now at just three years. We envisage the US Fed to embark on tapering its bond purchase programme in 2022, paving the way for potential interest rate hikes in 2023.

Pick-up in inflation is transitory.

  • Implied inflation based on 5-year Treasury Inflation- Protected Securities (TIPS) has increased by 0.65ppt year-to-date to 2.63%. However, most central bankers expect inflationary pressure to be transitory, caused by COVID-19- induced disruption to the supply chain (reopening friction) and higher oil prices.

On guard against complacency.

  • The pace of the Federal Reserve’s quantitative easing (QE) has accelerated (Global Financial Crisis: US$85b/month vs COVID-19 pandemic: US$120b/month). Expansion of money supply M2 has eased from the peak of 27% y-o-y in Feb 21 but remains elevated at 18.3% y-o-y in Apr 21. The sizeable increase in money supply could potentially fuel a pick-up in inflationary pressure.


  • The interest rate cycle is turning. More G7 countries are exiting emergency monetary support put in place during the onset of the COVID-19 pandemic. Given that interest rates in Singapore are highly correlated to the US’, we expect the transition in US monetary policy from accommodative to neutral and subsequently a tightening stance to trigger a re-rating for Singapore banks, pushing valuations toward up-cycle levels.

DBS (SGX:D05) (Target Price: S$35.45)

  • Management is upbeat on prospects for future growth in India (Lakshmi Vilas Bank) and China (Shenzhen Rural Commercial Bank and securities JV).
  • DBS has upgraded its guidance for loan growth to mid-to-high single-digit for 2021 (2020: +4.2%).
  • Management expect total provisions to be below S$1b in 2021 (2020: S$3.1b).
  • Exposure to loans under moratorium contracted significantly by 70% and dwindled from 4.3% to 1.3% of total loans due to the expiry of moratorium in 4Q20 (many borrowers did not seek extension).
  • BUY DBS. Our target price of S$35.45 is based on 1.56x 2022F P/B, derived from Gordon Growth 1.3%, COE: 7.75%, Growth: 1.5%).
  • See DBS Share Price; DBS Target Price; DBS Analyst Reports; DBS Dividend History; DBS Announcements; DBS Latest News.


  • New CEO Helen Wong will focus on capturing flows between ASEAN and Greater China, retail wealth management, sustainable finance and digitalisation.
  • OCBC has upgraded its guidance to mid-to-high single-digit loan growth for 2021 (2020: +0.6%).
  • Management expects credit costs to be at the lower end of guidance of 100-130bp over the two-year period (2020: 67bp).
  • Exposure to loans under moratorium dropped by 10.5% from S$5.7b (2.1% of total loans) in Jan 21 to S$5.1b (1.9% of total loans) in Mar 21. 92% of the loans under moratorium are secured by collateral.
  • BUY OCBC. Our target price of S$15.50 is based on 1.28x 2022F P/B, derived from the Gordon growth 9.6%, COE: 7.75%, Growth: 1.0%).
  • See OCBC Share Price; OCBC Target Price; OCBC Analyst Reports; OCBC Dividend History; OCBC Announcements; OCBC Latest News.


  • Gradual recovery in banks’ earnings and dividend due to decline in credit costs in 2021F and 2022F.
  • Continued recovery of the Singapore domestic economy accompanied by easing of safe distancing measures. Recovery in manufacturing and exports.


  • We maintain our existing forecasts for earnings and dividends.


  • Escalation of geopolitical tension and trade conflict between the US and China.

Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2021-05-31
SGX Stock Analyst Report BUY MAINTAIN BUY 35.450 SAME 35.450