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  • Singapore Banks to benefit from rate hike cycle
  • Provision writeback could provide earnings upside
  • Higher dividends a potential catalyst
  • Maintain BUY on UOB and OCBC; valuations of a c.1.0x FY22F P/BV remain inexpensive
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Singapore Banks to benefit from rate hike cycle. DBS economists now expect rate hikes to be delivered earlier and for two rate hikes in 2H22 if economic momentum is maintained with another two rate hikes in early 2023, with potential upside risks. This posits NIM and consequently earnings upside in 2H22 should the banks start to reprice loans on higher benchmark rates. DBS management has guided for S$1.8-2bn of incremental net interest income for every 100bps of rate hike. 

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Provision writeback could provide earnings upside in FY22F. While 3Q21 saw some headwinds in terms of higher regional NPLs and specific provisions largely arising from Malaysia’s new moratorium round, we believe risks are largely mitigated by the ample provisions buffer across the banks, as DBS and UOB have >S$1bn in overlays in general provisions, some of which may be written back, subject to the COVID-19 situation amongst others. Every 10bps decline in credit costs provides 5-6% earnings upside in FY22F.

Higher dividends a potential catalyst. We expect further upside in dividends in FY22F, due to Singapore Banks’ strong capital levels, which are above management’s comfortable operating range, although banks may also wish to keep some of the excess capital to deploy for growth and/or further corporate actions. OCBC is estimated to have S$4.6-5.7bn of excess capital, while UOB is estimated to have up to S$1.3bn of excess capital. This translates into >c.S$1.0/share and up to c.S$0.7/share for OCBC and UOB respectively.

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Maintain BUY on UOB and OCBC; valuations remain inexpensive. We believe current valuations of a c.1.0x FY22F P/BV are inexpensive and maintain our BUY calls on UOB (TP S$31) and OCBC (TP S$14). We continue to favour Singapore Banks across ASEAN banks due to their high earnings visibility, dividend yields, and certainty of firm earnings and ROE recovery beyond FY21F. Singapore Banks are Fed hike beneficiaries and  we can also look forward to potential writeback of provisions and potential return of excess capital in FY22F. 

Key risks: Slower-than-expected economic recovery, resurgence of pandemic cases and lockdowns, higher-than-expected credit costs, and/or Fed hikes later than expected.

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