Why are analysts divided?
Analysts have markedly different calls on the three Singapore banks, reflecting differing views on their valuations and how much they stand to benefit from the changing interest-rate environment.
Citi downgraded OCBC from “neutral” to “sell” with a target price of S$27.50. It maintained its “buy” rating on DBS and reiterated its “sell” rating on UOB, although it still preferred UOB over OCBC due to relative valuations and positioning.
Other brokerages were more bullish.
In an Oct 1 report, Macquarie Equity Research’s Vantarakis said that while all three banks would benefit from higher Singapore rates, UOB had the most to gain.
About 43 per cent of UOB’s loans are denominated in Singapore dollars, compared with 37 per cent to 38 per cent for DBS and OCBC. UOB also has a higher proportion of revenue coming from net interest income, at 66 per cent, compared to about 58 per cent for its two peers, he said.
RHB took a more bullish view of the sector. In its Oct 7 report, the brokerage gave a “buy” rating to all three banks, naming OCBC as its top pick and giving the bank a target price of S$33.70.
“OCBC is our sector top pick on all-round balance sheet strength and earnings momentum,” RHB said.
The brokerage ranked UOB as its second pick, followed by DBS.
Rising rates may boost Singapore banks’ growth, with OCBC and UOB likely to benefit more, RHB said, although DBS remained a core pick for dividend safety and yields.
“The rising benchmark rates may provide the operating income of the Singapore banks … with another leg for growth, which has predominantly been carried by non-interest income in recent quarters,” it added.
Who should investors believe?
Rather than focusing solely on analysts’ “buy” or “sell” calls, investors should assess the key drivers of the banks’ earnings, experts said.
“Analysts largely agree on the fundamentals and differ mainly on how much to pay for them, so investors should look at the reasoning behind each call and not just the rating,” said Mr Thum.
One factor to watch is the Singapore Overnight Rate Average (SORA), and whether it continues to rise alongside US interest rates.
Investors should also consider the economic outlook and what it could mean for loan growth and borrowers’ ability to repay their debts, Mr Tay said.
Another question is whether continued inflows into wealth management can sustain the banks’ growth in fee income.
Taken together, these factors help determine whether the banks can generate enough earnings growth to justify their valuations.
For long-term investors, a dividend yield of about 4 per cent backed by strong balance sheets would still make the banks worth holding, said Mr Thum.
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