Brokerage firm revises outlook for Singapore’s three largest banks due to muted impact from Fed rate hikes and economic headwinds.
Jefferies has downgraded its ratings on Singapore’s three largest banks—DBS, OCBC, and UOB—from “buy” to “hold,” citing concerns over a flattening yield curve and the muted transmission of US Federal Reserve rate hikes to local rate benchmarks.
In a report issued on Thursday, March 31, equity analyst Krishna Guha lowered his target prices for all three banks. DBS was reduced to S$32 from S$36, OCBC to S$12.50 from S$13.10, and UOB to S$32 from S$33.50. Guha believes that the risk-reward profiles of these banks are now balanced, given that their share prices have risen between 10% to 20% year-to-date and that current sector forward multiples are above their historical averages.
At 3.40 pm on Friday, DBS shares were down by 0.3% to S$35.71, OCBC was up by 0.1% to S$12.39, and UOB was down by 0.1% to S$32.
Guha noted that the 3-month Singapore Overnight Rate Average (Sora) has not yet priced in the Fed rate hike, and if the muted pass-through continues, it could negatively impact margins as loans are eventually priced off the Sora benchmark. He also revised loan growth estimates downward, factoring in high costs across all three banks amid the risk of stagflation. According to Guha, loan statistics for February indicate that loan growth will likely remain slow, with consumers showing signs of fatigue.
The analyst further suggested that volatility in financial markets could dampen non-interest income growth, while rising oil prices could create room for writebacks. Specifically, DBS, which has historically relied on non-interest income during low-rate periods, may be impacted by sluggish and sporadic market volatility. For OCBC, the challenges of sluggish markets and widening spreads could hurt its insurance business and trading income. As for UOB, widening credit spreads and its exposure to small and medium-sized enterprises (SMEs) may create asset quality risks, potentially affecting its capital ratios.
