• Upgrade to O/W from Neutral; Top Picks: United Overseas Bank (UOB) and DBS. Market volatility may persist following the 2024 US presidential election and shifting expectations on the US Federal Funds Rate (FFR) path, among others. Singapore bank stocks we cover (SG Banks) offer investors solid defensive options to tide through this. Earnings downside risk should be limited with four US FFR cuts already baked in, while dividend yields remain attractive – further supplemented by potential capital management initiatives, now that the banks have better clarity on excess capital available.

• A defensive shelter ... We think SG Banks present a good option to hide out from the abovementioned volatility – both from a domestic and regional perspective. Earnings downside risk looks low, with the flat earnings expected for the sector next year already taking into accountthe four US FFR cuts and given steps by banks to protect NII. On the other hand, with swap prices indicating a less aggressive FFR cut cycle, there could be upside to NIM and earnings. Also, non-II has surprised positively this year and, should investor sentiment stay buoyant in 2025, we see this as another potential source of upside surprise as well. Finally, loan coverage buffers were raised further in 3Q24, which gives us comfort that credit cost can be contained.

• … while dividend yields still look attractive ... The sector offers a FY25F dividend yield of 5.6%. We think this is attractive, with room for yields to compress amid falling rates. Furthermore, there could be upside risk to dividend projections for SG Banks from better-than-expected earnings and more aggressive capital returns. DBS offers dividend safety, given its guidance for a fixed step-up in absolute DPS. On the flip side, should earnings next year turn out to be better than expected, OCBC Bank (OCBC) and UOB may offer investors better exposure to ride on the upside potential to DPS.

• … with upside from capital management initiatives. With Basel III reforms having gone live and SG Banks reporting fully phased-in CET-1 ratios of >15% (above the comfortable business-as-usual (BAU) operating level of c. 13.5- 14%), capital returns will be a key thesis for SG Banks next year. SG Banks are set to share more on their capital management plans in the 4Q24 reporting quarter, and we see this as a near-term catalyst for the sector.

• Strong earnings season. 3Q24 results were a slight beat, thanks to another strong quarterly performance from DBS. Strong investor sentiment helped boost wealth fees (the key variance). Although 9M PATMI for all three banks were tracking ahead of forecasts, we expect a softer 4Q as rate cuts kick in, coupled with seasonality. 3Q24 sector PATMI rose 7% QoQ (+14% YoY), driven by non-II (+18% QoQ, +33% YoY) – specifically T&I income (+42% QoQ; +56% YoY). NII was flattish, operating efficiency improved thanks to income growth, while CoC ticked up as banks built up provision buffers and there were operational merger issues in Thailand (UOB).

• 2025 broad outlook was not surprising – the NIM squeeze will be cushioned by improved loan growth momentum, healthy fees and the normalisation of credit cost run rates. No systemic issues were noted on asset quality.

• Earnings forecasts. The PATMI changes were mild at both sector and bank levels. At the sector level, our FY24- 26F PATMI increased by 1%, 1% and 2%. We estimate FY24F sector PATMI to rise by a very decent 7% YoY but stay flat in 2025 (albeit with a higher base) due to NIM pressure, a moderation in non-II growth and impact from the global minimum tax rate

Source: RHB Securities Research - 25 Nov 2024