Macro headwinds will be the culprits.
According to Maybank Kim Eng, Singapore bank stocks have done well thus far, with the FSTFN (FTSE Straits Times Financials Index) up 28% YTD vs a gain of 16% for the benchmark FSSTI Index.
Here's more Maybank Kim Eng:
Share prices of DBS, UOB and OCBC are respectively up 22%, 22% and 17% YTD and this undoubtedly flies in the face of our Underweight call on the sector.
Earnings wise, the Singapore banks have continued to deliver and certainly, the strong credit ratings of these banks coupled with decent dividend yields have been catalysts to share prices.
But macro headwinds persists. As it stands, however, our Underweight call has been a macro one and we do still believe that headwinds on the external front will still bear down much harder on Singapore’s open economy, relative to its regional peers, whose economies are shielded to some extent by strong domestic demand.
This has, to some extent, been borne out by recent economic trends such as the 1.5% QoQ contraction in Singapore’s 3Q12 GDP, with manufacturing having contracted over two consecutive quarters and the IPI declining 2.3% YoY and 2.5% in Aug and Sep respectively.
Our GDP growth forecast for Singapore was recently lowered to 2.1% for 2012 (from 3%; 2011A: +4.9%) and 3.8% for 2013 (from 5%). While we expect a moderate pick-up into 2013, there is greater risk to the downside at this stage.
The anticipated recovery in 1Q12 NIMs for the industry was short-lived, with the compression in 2Q wiping this out (and more) and we believe that this compression will persist into 2H12.
We see NIMs stabilizing in 2013 but the persistence of low interest rates is a factor that is likely to cap the extent of such recovery in margins. Separately, domestic loan growth continues to tail off and is likely to continue slipping, particularly as the impact from recent mortgage rulings begins to filter through.
Given the above scenarios, we look to a tapering off of earnings momentum and forecast cumulative operating profit of the three banks to expand at a slower pace of 7% in 2013 vs 10.2% in 2012 (2011A: +0.5%) and recurring net profit to grow by 6.1% vs 13.7% in 2012.
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