Singapore’s banking giants—DBS Group Holdings, Oversea-Chinese Banking Corporation (OCBC), and United Overseas Bank (UOB)—are in the spotlight as Morningstar Equity Research analyst Michael Makdad raises their target prices by 3% to 6%. The move comes amidst shifting expectations regarding the US Federal Reserve’s monetary policy.
Fed’s Shift Supports Singapore Banks
Makdad’s latest analysis highlights the possibility of fewer US interest rate cuts, as suggested by comments from Federal Reserve officials. “The Fed may be more likely to hold than to cut US interest rates,” he wrote in a note dated Jan 10. While futures markets now predict one to two rate cuts, this is down from expectations of two to three cuts a month ago.
The Monetary Authority of Singapore (MAS) targets the Singapore dollar’s exchange rate, leaving interest rate levels to market forces. As such, fewer US rate cuts would translate to smaller reductions in Singapore dollar interest rates—a scenario that benefits local banks by helping them sustain net interest margins (NIMs).
Revised Fair Values and Upside Potential
Makdad has adjusted his fair value targets for the three banks:
- DBS Group Holdings: Up from $44 to $46, with a 5% upside.
- OCBC: Up from $17 to $18, also with a 5% upside.
- UOB: Up from $39 to $40, offering an 8% upside.
“While UOB is not as geared to strong growth in wealth management, the market underappreciates its potential for expanded shareholder returns in the form of dividends and buybacks,” Makdad noted.
Buybacks and Wealth Management Growth
UOB’s $2.5 billion capital surplus—4% of its market capitalization—positions it for aggressive buybacks and capital returns. This aligns with a December report by Jefferies analysts Sam Wong, Joseph Dickerson, and Chen Shujin, who projected $2 billion in additional buybacks for each bank in FY2025.
Meanwhile, Singapore banks are benefiting from faster-than-expected growth in wealth management fees, driven by buoyant equities markets and increasing demand from Asia’s affluent individuals. DBS stands out as the primary beneficiary, followed by OCBC, according to Makdad.
Net Interest Margins and Long-Term Trends
Singapore banks are currently enjoying NIMs of 2.1% to 2.2%, significantly above the 20-year average of 1.8% to 1.9%. While Makdad had earlier predicted NIMs would fall to 2% over the next few years, he now expects them to stabilize closer to 2.1%, albeit with slight declines.
Potential Risks
Despite the positive outlook, some analysts caution that Singapore banks’ stock prices, which rose 30% to 45% in 2024, may face pressure if the macroeconomic environment shifts. Additionally, NIMs, while robust, remain above historical averages and could compress over time.
However, Makdad remains optimistic. “Credit costs are benign, and there aren’t many struggling borrowers outside a few areas like office property,” he said.
Investor Guidance and Ratings
Makdad has assigned a three-star rating to DBS, OCBC, and UOB under Morningstar’s five-tier scale, suggesting a fair risk-adjusted return in line with the cost of equity.
Upcoming Earnings Reports
Investors will gain more clarity as the banks release their FY2024 earnings:
- DBS will announce results on Feb 10.
- UOB is scheduled for Feb 19.
- OCBC’s earnings call date is yet to be announced.
With attractive upsides, sustained margins, and a steady growth trajectory, Singapore’s banks are positioning themselves as a compelling play for investors navigating an evolving economic landscape.
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