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HSBC: Buy ALL Singapore Banks If You Can!
Hot Picks, Tradeable | 04 November 2014
By: Tradeable
Articles (256)

Last week, the world’s second-largest bank (by total assets), HSBC released a largely favourable outlook for the Singapore banking sector (comprising of DBS, OCBC, and UOB). Calling it a “positive asymmetrical investment proposition”, the banking giant called on investors to “buy all the Singapore banks if you can.” The favourable review comes in contrast from other research houses such as CIMB which is keeping a “Neutral” rating on the sector.

Here’s What HSBC Mentioned
HSBC sang much praises about the fundamentals of local banks. HSBC’s analysts contend that Singapore banks have had a solid track record when it comes to handling credit risk. This conclusion was drawn from various financial crisis from history, particularly the recent Eurozone debt crisis and the Great Recession of 2008.

In addition to fundamentals, HSBC pointed out that Singapore banks have “undemanding valuations”. Basically, the three local banks have forward P/B and P/E values that are below historical averages.

With little downside risks, HSBC notes that the main upside catalyst for the three local banks are the potential interest rate increases in 2015. When interest rates rise, HSBC expects the banks to benefit by increasing interest margins. This would thus lift earnings and ROEs.

DBS Group Holdings- HSBC’s Preferred Pick
Rating: Overweight

Previous close: $18.82 (3 November 2014)

HSBC’s target: $25

Potential appreciation: +32.84%

Forecast dividend yield: 3.9% (FY14) / 4.6% (FY15)

Forecast ROE: 11.7% (FY14) / 12.1% (FY15)

Despite HSBC’s glowing review of the banking sector, HSBC reserved more praise for DBS Group. Essentially, their preferred pick, HSBC goes on to say that DBS offers cheaper valuations and higher earnings sensitivity to rising rate. “On our estimates, a 50 basis point rise in rates could lift 2015 earnings for DBS by 16 percent, OCBC by 14 percent and UOB by 13 percent”.

Oversea-Chinese Banking Corporation
Rating: Overweight

Previous close: $9.95 (3 November 2014)

HSBC’s target: $13

Potential appreciation: +30.65%

Forecast dividend yield: 3.5% (FY14) / 4.0% (FY15)

Forecast ROE: 12.5% (FY14) / 12.4% (FY15)

The acquisition of Wing Hang bank could potentially push OCBC‘s financial performance in FY15 northwards. However, there are concerns that merger hiccups could happen. Coupled with a slower-than-expected loan growth, OCBC’s fortunes could make an about-turn. That being said, HSBC continues to feel that the probability of such events occurring are remote. They thus remain fairly bullish on the counter.

United Overseas Bank
Rating: Overweight

Previous close: $23.29 (3 November 2014)

HSBC’s target: $26.95

Potential appreciation: +15.71%

Forecast dividend yield: 3.5% (FY14) / 3.8% (FY15)

Forecast ROE: 12.0% (FY14) / 12.3% (FY15)

The local bank expected to appreciate the least, HSBC feels that UOB could be close to a fair valuation at the moment. In addition, the bank is also likely to benefit the least from rising interest rates than its two local peers. This is likely due to the fact that UOB’s growth largely comes from its fee incomes that are not directly affected by rising interest rates.

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