Citi Upgrades DBS Bank

In a notable shift within Singapore's banking sector, Citi has upgraded DBS Bank to a ‘neutral’ rating following its impressive third-quarter fiscal results for 2024.

Key Factors Driving Positive Sentiment

The upgrade came as analysts observed several key factors driving a positive sentiment in the banking industry. Analysts cite a rapid transition in rates expectations, boosted by escalating bond yields for both U.S. two-year and ten-year treasuries. Furthermore, optimism stemming from robust performances by U.S. banks and DBS's aggressive $3 billion share buyback program have significantly contributed to this reassessment.

Analyst Insights on Economic Outlook

Analyst Tan mentions, 'While our U.S. economist expects a dip in economic data leading to substantial rate cuts, the scenario could change if inflationary pressures arise from a possible second Trump administration.' He also highlighted that wealth management activities at DBS remain strong, with assets under management reaching record highs. Investors are increasingly gravitating towards higher-yielding products, moving away from traditional treasury offerings.

Earnings Forecasts for DBS

In light of DBS's recent third-quarter earnings results, Tan has increased his earnings per share (EPS) forecasts for FY2024, FY2025, and FY2026 by 6%, 5%, and 6%, respectively. This revision is driven by robust non-interest income and a reduction in provisions. Notably, while his net interest income (NII) forecast remains unchanged, he has revised his fee income estimates upward by 4% to 6%. The quality of assets has improved, allowing for a decrease in provisions from 25 basis points to 17 basis points, along with $2 billion in excess general provisions.

Buyback Plans and Dividend Expectations

With the implementation of DBS's buyback plans, Tan anticipates higher dividends per share (DPS), estimating 60 cents, alongside a special DPS of 50 cents in 4QFY2024. However, he cautions that this buyback initiative may be a one-time event, urging caution due to restrictions on maintaining any single shareholder's stake below 30%. Tan explains, 'If all buyback shares are executed, this would adjust the pro-forma common equity tier 1 (CET-1) ratio from 15.2% to 14.4%, indicating that further buybacks are unlikely unless faced with a significant downturn.'

Target Price Increase for DBS

Tan has also raised his target price for DBS from $35 to $40.10, reflecting a price-to-book (P/B) ratio of 1.7 times, close to the current valuation of 1.8 times P/B.

Maintaining 'Sell' Rating on UOB

In contrast, Tan has maintained a ‘sell’ rating for United Overseas Bank (UOB) after its third-quarter results. While he acknowledges UOB’s improved CET-1 ratio—an unexpected highlight—his stance remains unchanged with a target price set at $29.

UOB's Capital Position

UOB’s capital position has strengthened since the implementation of post-Basel 3 reforms, with the CET-1 ratio rising to 15.5% as of September 30. However, Tan suggests that this improvement is due to the harmonization of risk-weighted asset (RWA) densities across competitors.

Future of UOB Capital Management

Despite UOB's conservative management approach to capital allocation, which has resulted in no major capital initiatives so far, Tan has speculated on potential avenues for capital management moving forward. He considers scenarios such as quarterly distributions, special dividends, or even noteworthy share buyback programs.

CEO and CFO Insights on Capital Strategy

UOB's CEO, Wee Ee Cheong, affirmed the bank's strong capital position in remarks from November 8, indicating that the bank is contemplating various capital management strategies. CFO Lee Wai Fai echoed this sentiment, stating that UOB would evaluate all options, including share buybacks and strategic investments, to leverage growth opportunities in the ASEAN region.

Speculations on UOB's Future Moves

Tan's report hinted that significant developments regarding UOB's capital management could materialize with the upcoming 4QFY2024 results, which may feature immediate actions alongside long-term strategies.

Market Reactions

Market responses have been telling, with UOB's shares soaring to an all-time high of $36.508 before closing at $35.69—reflecting a rapid 7.177% rise. Meanwhile, DBS shares also climbed, closing 1.68% higher at $42.40, underscoring the growing optimism surrounding these banking powerhouses.

Looking Ahead