CIMB is downgrading the banking sector to “neutral” from “overweight” as valuations have recovered.
Since the trough in Feb, the banks have gained 15% since the trough in Feb, outperforming the STI as the recovery in oil price eased concerns on exposure to the commodities sector.
“We think this is a good time to trim exposure, especially in view of earnings headwinds from a slowing topline and rising costs. We downgrade our sector weighting from Overweight to Neutral,” says lead analyst Kenneth Ng in a Tuesday report.
Ng says the 1Q16 results season was “uninspiring” as banks saw limited loan growth and Net Interest Margin upside, and capital markets fees faltered. Only DBS saw relatively resilient non-Net Interest Income.
In a slowing environment, DBS has the added engine of its bancassurance deal with Manulife to prop up fee income.
“DBS now replaces OCBC as our top pick and is the only Add call in the sector. We think the concerns over its NPLs are priced in at 0.9x P/BV,” says Ng, who has a $17.96 target.
Meanwhile, OCBC disappointed on the back of broad-based fee income weakness, coupled with mark-to-market losses on Great Eastern Holdings’ non-participating fund.
“With a disappointing ROE of 10.1%, we downgraded OCBC from Add to Hold. Switch to DBS,” says the analyst, who has a target price of $8.80.
As for UOB, the lender remains CIMB’s least preferred bank for its largest exposure to SMEs, which are likely to see the biggest hit as the credit cycle turns.
“UOB also relies more on fixed deposits for funding, which limits upside for NIMs,” says Ng, who has a “Hold” with target pf $18.74.
DBS, OCBC and UOB closed at $15.35, $8.60 and $18.40 respectively on Tuesday.
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Since the trough in Feb, the banks have gained 15% since the trough in Feb, outperforming the STI as the recovery in oil price eased concerns on exposure to the commodities sector.
“We think this is a good time to trim exposure, especially in view of earnings headwinds from a slowing topline and rising costs. We downgrade our sector weighting from Overweight to Neutral,” says lead analyst Kenneth Ng in a Tuesday report.
Ng says the 1Q16 results season was “uninspiring” as banks saw limited loan growth and Net Interest Margin upside, and capital markets fees faltered. Only DBS saw relatively resilient non-Net Interest Income.
In a slowing environment, DBS has the added engine of its bancassurance deal with Manulife to prop up fee income.
“DBS now replaces OCBC as our top pick and is the only Add call in the sector. We think the concerns over its NPLs are priced in at 0.9x P/BV,” says Ng, who has a $17.96 target.
Meanwhile, OCBC disappointed on the back of broad-based fee income weakness, coupled with mark-to-market losses on Great Eastern Holdings’ non-participating fund.
“With a disappointing ROE of 10.1%, we downgraded OCBC from Add to Hold. Switch to DBS,” says the analyst, who has a target price of $8.80.
As for UOB, the lender remains CIMB’s least preferred bank for its largest exposure to SMEs, which are likely to see the biggest hit as the credit cycle turns.
“UOB also relies more on fixed deposits for funding, which limits upside for NIMs,” says Ng, who has a “Hold” with target pf $18.74.
DBS, OCBC and UOB closed at $15.35, $8.60 and $18.40 respectively on Tuesday.
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