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Phillip: DBS Has A 12% Upside Potential! Here’s Why.
Aspire, Hot Picks | 24 February 2015
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By: Lim Si Jie
Articles (169) Profile

Phillip notes that share price performance of banks have a history of being correlated “with the interest rate cycle”. The average share price CAGR (Compounded Annual Growth Rate) of banks through phase A was -11.3 percent (interest rates fell), followed by 14.3 percent (interest rates rose), -12 percent (interest rates fell), and 17 percent (interest rates flat).

Fed Fund Rates Still Takes The Lead

Given that interest rates are showing signs of rising, banks might experience the same increase in share price as in phase B. However, Phillip’s research does point out that even though SIBOR usually “moves in tandem with Fed Fund rates” SIBOR had actually moved slightly ahead of Fed Fund rates last month. Essentially, the SIBOR uptrend will only continue when Fed Fund rates increase.

Improving Net Interest Margins (NIMs)

About 80 percent of Singapore dollar denominated loans within the banking sector is priced against the SIBOR and SOR (Swap Offer Rates; this rate is based on foreign exchange rates with the US dollar). On the cost side, funding is relatively comfortable for banks. CASA (Current Account and Savings Account) deposits are cheap, ranging from 41.0 percent (UOB) to 55.4 percent (DBS).

Phillip believes that “repricing of loans between three to six months” and “loan yields to inch up from 2Q15 onwards” would most likely happen. Phillip notes that DBS is “best positioned to leverage” upon the improving NIMs because of its larger loan portfolio.

Priority Still Lies In Economic Growth For FY 16

Essentially, Singapore banks are dependent on the geographic economies and the sectors that the latter is exposed to. Healthy growth in GDP and loans is an important factor in boosting valuations and share prices. However, the growth in loans would most likely to stagnate moving towards FY16 because the economies in Singapore and the Asian regions are slowing down. The lower forward growth outlook does, however, mean that banks are currently trading at a discount to 10 year mean P/B.

Phillip: OVERWEIGHT On Banking Sector

Phillip would continue to be “OVERWEIGHT on Singapore Banking Sector for FY15″ with the increasing of SIBOR net rates most likely to be positive for banks. NIMs are expected to move higher while EPS growth is likely to slow down.

As such, DBS maintains as Phillip’s “top pick for best positioning” in an environment where interest rates are rising and heavily affected by the fluctuation of the US dollar.

Although Phillip maintains an OVERWEIGHT rating in Singapore’s Banking Sector for 2015, the former believes that FY16 will not be as optimistic. Higher valuations for banks is unlikely to happen due to slowing loans growth.

Si Jie is no stranger to investing having started his journey at a young age. He is heavily influenced by acclaimed investors such as Benjamin Graham, Peter Lynch, and John Rothchild.

Please click here for more information about this author.

DBS Group Hldgs  25.030 -0.27 -1.07%   
Business: [FY18 Total Income] Institutional banking (43.7%), consumer banking/wealth management (42.9%), treasury markets and others (13.4%).

Insight: Apr-19, 1Q19 net profit rose 9% to a record $1.7b.... Read More
Oversea-Chinese Banking Corp  10.950 -0.08 -0.73%   
Business: [FY18 Turnover] Global corporate/investment banking (35%), global consumer/private banking (34.8%), OCBC Wing Hang (11.5%), insurance (11%), global treasury & mkts (7.7%).

Insight: May-19, 1Q19 total income rose 14.7% driven by str... Read More
United Overseas Bank  25.900 -0.35 -1.33%   
Business: [FY18 Turnover] Group retail (43.3%), group wholesale (43.2%), global markets & investment management (5.1%), others (8.4%).

Insight: May-19, 1Q19 total income rose 7.8% to $2.4b due t... Read More

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