Why Jefferies bumped Singapore's DBS and OCBC up to 'buy' ratings

Published Wed, Nov 11 20208:03 PM EST

(This story is for CNBC PRO subscribers only.) SINGAPORE — Jefferies said this week that Singapore's two largest banks by assets, DBS Group Holdings and Oversea-Chinese Banking Corp , are now a "buy." The upgrade for DBS and OCBC from a "hold" rating followed the banks' third-quarter earnings releases last week. Their financial reports pointed to a recovery in some business areas as Singapore and several East Asian markets they operate in have managed to control their Covid-19 outbreaks, which allowed economic activity to resume. DBS and OCBC, along with their smaller peer United Overseas Bank , have seen huge losses in their share prices for much of this year. But the shares have been climbing in the past week, with DBS and OCBC outperforming the benchmark FTSE Straits Times Index so far this year. Macroeconomic conditions have turned favorable for the three banks, said Krishna Guha, equity analyst from Jefferies, in a Monday report. He explained that factors supporting the better outlook include Covid-19 vaccine news, a weaker U.S. dollar , supportive central bank policies, and investors rotating into emerging markets as well as value and cyclical stocks. The Singapore banks have also built up sufficient reserves to cushion a potential rise in bad loans, said Guha. But UOB may need to do more, he suggested, given the bank's bigger exposure to small- and medium-sized enterprises that have been disproportionately hit by the pandemic. That's why Jefferies upgraded DBS and OCBC to "buy," while keeping UOB's rating at "hold." Guha said he has a preference for DBS, which is Southeast Asia's largest bank, for its quarterly dividend and ability to grow non-interest income. Still, the analyst bumped up his price targets for all three banks: DBS: from 20 Singapore dollars to 26 Singapore dollars, representing an upside of around 6.6% from the stock's Wednesday close. OCBC : from 8.80 Singapore dollars to 11 Singapore dollars, 14.6% higher than Wednesday's close. UOB: from 18 Singapore dollars to 22 Singapore dollars, around 2.6% above the close on Wednesday. Given a potential stabilization in asset quality, the three banks could reinstate dividends early next year, said Guha. Investors have traditionally favored Singapore banks for yield, but dividend payouts were capped this year by the country's financial regulator. Loan growth and margin outlook Despite the generally favorable operating environment, the banks' business volume and margins still appear tepid, according to the Jefferies report. In particular, the banks have not reported a recovery in trade loans even though some signs have pointed to a quicker rebound in global trade volumes, said Guha. But several factors can improve the banks' overall prospects, he added. "While loan growth and margin outlook seems soft, sustainability initiatives, supply chain shifts and inflecting consumer loan book can accelerate the top-line," he said. Guha also noted that the banks have guided for double-digit growth in fee income, which is improving on the back of higher wealth management volume. In addition, "healthy" market activity should support the banks' treasury income, said the analyst.

Aerial view of Singapore's central business district and bayfront area.

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(This story is for CNBC PRO subscribers only.)

SINGAPORE — Jefferies said this week that Singapore's two largest banks by assets, DBS Group Holdings and Oversea-Chinese Banking Corp, are now a "buy."

The upgrade for DBS and OCBC from a "hold" rating followed the banks' third-quarter earnings releases last week. Their financial reports pointed to a recovery in some business areas as Singapore and several East Asian markets they operate in have managed to control their Covid-19 outbreaks, which allowed economic activity to resume.

DBS and OCBC, along with their smaller peer United Overseas Bank, have seen huge losses in their share prices for much of this year. But the shares have been climbing in the past week, with DBS and OCBC outperforming the benchmark FTSE Straits Times Index so far this year.