Broker's take: Maybank KE downgrades DBS, OCBC, UOB to 'sell' on 'unsustainable' rally

MAYBANK Kim Eng (MKE) has recommended investors take profit on the stocks of Singapore's banking trio, given that their recent "too fast, too furious" run-up may be "unsustainable".

In a research note on Tuesday, MKE downgraded all three to "sell", two notches down from its previous "buy" rating on DBS and one notch down from its "hold" calls on UOB and OCBC.

It kept its target prices unchanged, though they now offer 2-8 per cent downside, at S$24.63 for DBS, S$9.29 for OCBC and S$21.24 for UOB, analyst Thilan Wickramasinghe wrote on Tuesday.

As at 3.57pm on Wednesday, DBS advanced 0.1 per cent or S$0.02 on the day to trade at S$25.62, OCBC fell 1.3 per cent or S$0.13 to S$10.15, while UOB dropped 1.3 per cent or S$0.30 to S$23.33.

The three banks have climbed more than 20 per cent since end-October, benefiting from the recovery trade catalysed by recent news of successful Covid-19 vaccine trials.

"We believe this is overdone and amplified by liquidity," the analyst said.

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"Uncertainty that existed in October still remains; non-performing loans (NPLs) are set to rise as moratoriums ease while borders remain closed, net interest margins (NIMs) continue to be under pressure, and dividend caps are unlikely to be lifted in 2021," he added.

Back in June, the three counters likewise saw gains as regional lockdowns were eased. But that was short-lived as the expected V-shaped economic recovery did not materialise, according to MKE.

It pointed to the bearish credit charge guidance which the trio largely maintained in their recently concluded Q3 2020 results season.

MKE said: "While we expect overall sector allowances to fall 46 per cent year on year in 2021, this is off a high base. In absolute terms, it is still 13 per cent higher than 2017 - the height of the offshore and marine crisis."

NPL visibility remains low due to loan moratoriums across the region. The repayment experience after Malaysia's moratoriums were lifted in Q3 has been "benign", but this is still too short a track record, the analyst wrote.

"We estimate NPLs may rise to 2.1 per cent next year - the highest since the global financial crisis," he added.

And despite the Covid-19 vaccine optimism, the brokerage believes an effective rollout and herd immunity being achieved may only be possible towards the end of 2021.

As for dividends, visibility is still muted, as clarity on the cap imposed by the Monetary Authority of Singapore (MAS) may come only near the end of H1 2021, MKE said.

MKE sees "a high chance" that MAS will roll forward 2020's dividend cap - currently set at 60 per cent of 2019 total dividends - to 2021, given that capital ratios will likely be weaker than when the limit was first introduced in July.

The banking stocks' dividend yields for 2021 are estimated to come in at 3.2 per cent on average, versus 6 per cent for large-cap real estate investment trusts, making DBS, OCBC and UOB "uncompelling" as dividend plays at this time, according to Mr Wickramasinghe.

He prefers Singapore Exchange's (SGX) stock to the three banks, as the bourse operator is set to benefit from market volatility as well as structural trends that are driving demand for its risk management products.

MKE has a "buy" call on SGX and a target price of S$10.77.

SGX shares moved up by 0.2 per cent or S$0.02 to trade at S$9.19 as at 3.58pm on Wednesday.