Goldman Sachs analysts Melissa Kuang and Olivia Shi foresee that 2024 will mark an inflection downwards for most Asean banks after their profitability peaked in 2023. This is likely due to a rate cut cycle happening as early as 1Q2024, according to Goldman’s economists. “We forecast Asean banks to enter a downward trend at differing paces, depending on the pace of policy rate cut in each region based on our economists’ forecasts,” they write.
However, instead of a tumble in the banks’ return on assets (ROAs), the analysts expect to see a gentle easing amid an anticipated rebound in Asean’s GDP. The expected GDP growth is supported by recovery in global trade, an easing in monetary policy and Thailand’s implementation of pro-growth fiscal policies and ongoing recovery in its tourism sector. Indonesia’s higher pre-election spending offsetting the drag from lower coal export prices is also another contributor to the region’s growth.
“For 2024, we expect ROAs to see [a] -0.07 percentage point to 0.02 percentage point contraction/expansion from 2023, with 2026 average ROA to be 4 basis points (bps) lower than 2024 levels and remain above 2019 (pre-Covid levels), ex Thailand banks (given large investment gains in 2019),” they say. This comes as net interest margins (NIMs) begin to decline as the world enters into a rate cut cycle. Singapore banks are expected to tip first as the Fed cuts are anticipated to begin in March 2024. This is then followed by Indonesian banks with rate cuts expected in the 2Q2024. Banks in the Philippines are likely to begin cutting rates in the 4Q2024 while Thai banks are the last with cuts to start in the 4Q2025.
That said, the banks’ NIMs are still likely to remain at or above 2019 levels. The analysts also see banks’ loan growth to accelerate on the back of macro tailwinds and the lower interest rate environment. Fee income recovery amid the easing financial market conditions and manageable credit costs as well as robust provisioning buffers are also expected in 2024.
“Earnings wise, on average we anticipate [an] earnings per share (EPS) growth of -3% to 10% for FY2024 and 0.4% to 8.1% for FY2025 — with Singapore banks to see declines in EPS growth in FY2024 and for Indonesia banks to see the highest growth,” say the analysts.
On the whole, the analysts see valuations for Asean banks to remain range bound in 2024 on the back of a better macro environment.
At their current levels, valuations are undemanding. Banks in Singapore, the Philippines and Thailand are trading at 1.13 times, 1.05 times and 0.60 times their 12-month forward P/B, below their three-year pre-Covid historical average P/B and above 1 standard deviation (s.d.) of 2.59 times for the Indonesian banks.
“Our historical analysis shows valuation compression is minimal in the early stages of a rate cut cycle when the macro outlook remains decent (our current assumption for this cycle). Valuation multiples only fall sharply on heading into a recession,” they say.
In addition, they note that banks’ share prices in absolute terms have historically been only “slightly down” when rate cuts start and tumble and when a recession hits.
“Interestingly, contrary to market understanding, banks in most cases outperform local indexes through the rate cut cycles with or without recession,” they add.
Among the Asean countries, Indonesia is the analysts’ most preferred region given their most robust mid-teen total book value (BV) creation for FY2022 to FY2025. The Philippines is their next preferred region with the second-highest total book value growth while Singapore ranks third in their list.
“ROAs will likely ease the most post peaking in 2023 driven by NIM contractions as local rates are likely to see the largest fall versus [their] Asean peers given its ties to the Fed. Nonetheless, we expect Singapore banks will see offset from a recovery in loan growth and also fee income with wealth to be the main driver as investment activities should recover in a lower rate environment, and also as Singapore continues to attract assets under management (AUMs) as a wealth hub,” say Kuang and Shi.
“For 2024 we do anticipate rise in credit cost from low levels in 2023 as we bake in risk from commercial real estate (CRE) exposures (mainly Hong Kong/China/ Western region) which should fade the year after,” they add.
DBS and UOB downgraded; OCBC top pick
Among the three Singaporean banks, Oversea-Chinese Banking Corporation (OCBC) is the analysts’ top pick as it looks to further optimise its capital, which was a long-term concern previously as excess capital dragged on the bank’s return on equity (ROE).
“Valuations are also still at a discount to peers, DBS and UOB, averaging -12% on P/B versus the historical three-year pre-Covid average of -7%, despite the narrowing in the ROA gap to peers,” they write.
The analysts have rated OCBC “buy”, the only Singaporean bank among the region’s institutions as it is “showing success from transformation [with] a desire to further optimise capital”. OCBC is also on Kuang and Shi’s Asia Pacific (APAC) Conviction list.
On the flip side, the analysts downgraded their call on DBS Group Holdings (DBS) to “sell” from “neutral” due to its relatively “rich valuations”. The bank’s NIM is also the most sensitive to rates in the event of a rate cut environment.
United Overseas Bank (UOB) was also downgraded to “neutral” from “buy” as the analysts see pressure in its earnings when the rate cuts start. The bank also has little room to raise its dividends unlike its peers given its tight common equity tier 1 (CET-1) ratio versus management’s comfort level to support its share price.