OCBC still bullish on banking stocks after a lacklustre FY18

Michelle Zhu

SINGAPORE (Mar 26): OCBC Investment Research remains bullish on Singapore’s banking space while keeping its sector “overweight” with “buy” calls on both DBS and UOB, which have been given fair value estimates of $29.31 and $28.30, respectively.

Both stocks had dividend yields of 4.8%, with DBS and UOB trading at the respective book values of 1.3 times and 1.1 times, or at an average of 1.2 times historical book as at the close of Wednesday.

In a Tuesday report, OCBC analyst Carmen Lee notes that raising this average to 1.3 times book and factoring a 10% premium for DBS over the other two years –  as was the case in recent years – would bring the banks’ fair value estimates to “quite similar levels” as those projected by the research house.  

She argues that while 4Q18 results for Singapore’s bank stocks were down, this was “not a complete surprise” considering a weak global market, further highlighting that full year earnings still concluded at record highs for all three banks.

Lee’s positive sector view comes in spite of a fairly lacklustre performance for Singapore’s banking stocks in the year to date (YTD), which she says could be partially due to expectations of lower fee income and that there will not be any further Fed rate hikes for the remainder of the year.

The analyst nonetheless sees another record year for banks in FY19, albeit at a lower single-digit growth in terms in of earnings; making it therefore reasonable to expect the FTSE ST Financials Index (FSTFN) to trade back to the norm, or the 10-year average of 1.1 times book.

“Similarly, with projected record earnings in FY19, it is not unreasonable to expect a re-rating of the banking stocks back to the 10-year average, pending no deterioration in market conditions,” adds Lee.

As at 3:17pm, shares in DBS and UOB are trading at $24.99 and $24.95, respectively.