RHB on Monday (Nov 25) upgraded its call on Singapore’s banking sector to “overweight” from “neutral” in September, as it made a “buy” call for two of the three Singapore bank stocks covered.
Its top picks for the sector were UOB, with a buy call on a target price of S$40.20, and DBS, also a “buy”, with a target price of S$44.70. The research house was neutral on OCBC with a target price of S$16.80.
This comes as the research team expects Singapore’s banking sector to offer attractive dividend yields for the upcoming financial year while offering a “solid defensive option” against market volatility following the US presidential election.
Noting that Singapore banking stocks could provide a “defensive shelter” for investors, RHB’s research team said: “Market volatility may persist following the 2024 US presidential election and shifting expectations on the US Federal Funds Rate (FFR) path … We think Singapore banks present a good option to hide out from this volatility – both from a domestic and regional perspective.”
It added that earnings downside risk for Singapore banks should be low and “limited”, as flat earnings are expected for the sector next year given the four US rate cuts that took effect and actions by the banks to protect their net interest incomes.
“On the other hand, with swap prices indicating a less aggressive FFR cut cycle, there could be an upside to net interest margin (NIM) and earnings,” the research team said.
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Noting that non-interest income (non-II) had “surprised positively” this year, it added that this may prove to be a source of “upside surprise” moving forward, if investor sentiment remains buoyant in 2025. Furthermore, the raising of loan coverage buffers for the third quarter of 2024 provides “comfort that credit cost can be contained ”, the research team added.
Another reason for RHB’s upgrading of the sector is its “attractive” dividend yields. The research house projects a 5.6 per cent dividend yield for the Singapore banking sector in FY2025, “with room for yields to compress amid falling rates”.
RHB added that Singapore banks’ dividend projections may experience “upside risks” due to better-than-expected earnings and more aggressive capital returns.
It pointed out that DBS provides dividend safety “given its guidance for a fixed step-up in absolute dividend per share (DPS)”.
“On the flip side, should earnings next year turn out to be better than expected, OCBC and UOB may offer investors better exposure to ride on the upside potential to DPS,” the research team said.
A positive outlook for the Singapore banking sector is another factor behind RHB’s “overweight” call.
The research team forecasts that the sector’s profit after tax and minority interests (Patmi) will experience a “very decent” seven per cent year-on-year growth for FY2024 – with the caveat that Patmi is expected to remain flat in 2025, “albeit with a higher base”.
It believes that this will come on the back of “NIM pressure, a moderation in non-II growth and impact from the global minimum tax rate”.
Regarding predictions for the sector’s broad outlook for 2025, RHB added that the sector’s “NIM squeeze will be cushioned by improved loan growth momentum, healthy fees and the normalisation of credit cost run rates.”
