After the Federal Reserve’s emergency rate was slashed last Tuesday (3 March), the ratings for Singapore banks have been downgraded by analysts. The lower rate is expected to compress net interest margins (NIM), reported by the trio.
Due to the growing fears of economic slowdown as a result of Covid-19, The Fed announced a 50 basis point interest rate cut as part of its emergency measures.
According to a sector note released last Wednesday (4 March), Singapore bank sector has been downgraded by CGS-CIMB from “overweight” to “neutral” because banks’ revenues are expected to suffer losses. The FY2020 forecast done by Andrea Choong and Lim Siew Khee, two CGS-CIMB analysts, predicted that the NIM will compress by 10 to 12 basis points.
The analysts also accounted for the “highly probable” 25 to 50 basis point rate slash in the upcoming Federal Open Market Committee meeting. They opined that “the resilience in Singapore dollar rates may falter”.
The banks’ dividend yields, of around 5 per cent, will still play a role as a key support factor to the banks’ valuations, the brokerage remarked.
Lim Rui Wen, an analyst from DBS Group Research, forecasts a six to nine basis point decline in NIM across banks. Loan yields will also undergo further compression in light of ongoing competition in mortgages and flight to quality loans.
“Following the Fed’s move, as well as Hong Kong’s rate cut in tandem, we believe there is further SIBOR/SOR (Singapore Interbank Offered Rate/Swap Offer Rate) downside,” noted Ms Lim.
United Overseas Bank (UOB) has been downgraded by both CGS-CIMB and DBS Group Research. CGS-CIMB downgraded UOB to “hold” and reduced its target price from 28 Feb’s target price of S$28.39 to S$24.91. DBS Group Research also downgraded UOB to “hold”, reducing its target price from S$27.20 to S$25.50.
On Thursday (5 March), UOB shares fell S$0.26 or 1.1 per cent on a cum-dividend basis as they closed at S$23.74.
Similarly, the ratings for OCBC have also been maintained “hold” by CGS-CIMB and DBS Group Research. CGS-CIMB reduced OCBC’s target price from 28 Feb’s S$11.64 to S$11.05. DBS Group Research also reduced OCBC’s target price from S$11.50 to S$11.00.
On Thursday, OCBC shares fell down S$0.13 or 1.2 per cent on a cum-dividend basis as it closed at S$10.42.
In addition, CGS-CIMB downgraded the rating of DBS to “hold” with a lower target price than its 28 Feb’s S$27.09 to S$24.33. Despite this, due to the better track record of small and medium enterprise portfolio, margin management and dividend visibility by DBS, CGS-CIMB stated that it prefers DBS out of the three lenders.
The rating for DBS has also been maintained “hold” by OCBC Investment Research at a fair value estimate of S$25.50, which is lower than its 13 Feb’s fair value estimate of S$27.50. The risk of a more lingering virus outbreak situation is also incorporated in the fair value estimate of DBS.
Because DBS has a higher ratio of deposits in its current and savings accounts to total deposits and a larger proportion of US dollar-denominated loans, DBS is comparatively more rate-sensitive compared to UOB, according to OCBC Investment Research.
Nonetheless, the report states that the bank’s capital position is still solid.
On Thursday, DBS shares fell by S$0.31 or 1.3 per cent on a cum-dividend basis as it closed at S$23.60.