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Phillip: DBS Boasts 10% Upside, 2.9% Yield
Aspire, Hot Picks | 26 May 2015
By: Lim Si Jie
Articles (169) Profile

The three banks in Singapore’s banking sector recently released its first quarter results. With all three banks picking up on Net Interest Margins (NIM) but experiencing slower loan growth in Q1, Phillip continues to hold a slightly positive outlook on the banking sector. In particular, DBS will be poised to edge ahead of the rest to offer investors better returns.

NIMs To Pick Up

Source: PSR

NIMs are slowly picking up in 2Q15 with DBS reporting 1.69 percent, OCBC 1.62 percent and UOB 1.76 percent. Phillip singled out UOB as the most surprising bank to report a rise in NIMs by seven Basis Points (BPS). Initially, UOB’s management expected a flat NIM for FY15. On the other hand, both DBS and OCBC NIMs declined Quarter-over-Quarter (Q/Q) by two BPS and five BPS respectively.

Looking forward into 2Q15, NIMs for DBS and OCBC are expected to pick up again due to repricing effects from a Singapore Interbank Offered Rate (SIBOR) or Swap Offer Rate (SOR) increase. For UOB, a large proportion has already been priced in. Thus, Phillip expects “a 1-2 BPS decline in 2Q15”. Loans growth guidance for FY15 has toned down marginally to a mid-single digit percentage for all three banks.

Slower Loan Growth Expected

Lower commodity prices, trade volumes and flattening of China onshore-offshore rate differentials are affecting bank earnings, as seen from 1Q15. Phillip predicts that loan growth will be stagnant or may even contract with trade-related fees growth slowing as well. Trade finance business will continue to slow down for Singapore’s banking sector in 2015.

Non-Interest Income Adds Volatility

OCBC, UOB and DBS were lifted in 1Q15 due to a rise in non-interest income. DBS had the highest change among the three banks of 135 percent. OCBC registered a growth of 54 percent in non-interest income while UOB gained 31 percent.

Net trading income improved Q/Q across the board, driven by higher customer flows and trading gains. Phillip sees the non-interest income as a wildcard that could swing both ways and warn that investors should continue to expect volatility in the upcoming quarters.

DBS Edges Ahead In WM and Other Fees

Wealth Management (WM) has been a strong performer for the sector in 1Q15. The WM segment performed strongly for all three banks with DBS’s 52 percent growth outperforming OCBC and UOB.

On top of WM performance, DBS differentiates itself from the rest of the pack with growth in other fees. It boasts a strong 22 percent growth in overall fees while OCBC and UOB’s were largely flat. Moving forward, the banking sector continues to place focus on growing the WM business.

DBS Remains As Top Pick

Following the 1Q results and taking into account better margins in 2Q and slower loans growth projections, Phillip is raising FY15 earnings estimates. In addition, Phillip is also increasing DBS’s fair value estimate to $23. With a dividend yield of 2.86 percent, DBS remains as Phillip’s top pick in the Singapore banking sector.

OCBC (TP: $11.30) and UOB (TP: $26) retains its ACCUMULATE rating based on Phillip’s P/B derived valuations.

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.


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