Banks kept at ‘overweight’ by UOB on Fed’s dovish stance, dividend yield

SINGAPORE (Jan 18): UOB Kay Hian is maintaining Singapore’s banking sector at “overweight” after the US Fed calmed the nerves of investors with its dovish disposition, which subsequently generated a relief rally.

“We maintain ‘buy’ for both DBS and OCBC, although we prefer OCBC,” says analyst Jonathan Koh in a Friday report. The research house has target prices of $28.50 and $13.82 respectively.

Fed’s narrative took a dovish turn in mid-Nov when Fed Chairman Jerome Powell highlighted potential headwinds buffeting the US economy in 2019, including a slowdown in growth overseas and and the lagged effect from the nine previous hikes in Fed funds rate since late 2015.

Powell reiterated that the Fed’s goal is to extend the economic recovery while keeping unemployment and inflation low. He also said that the Fed would have to rethink how much further interest rates should be raised and the pace of raising interest rates.

However, Koh says financial markets had wrongly interpreted that the Fed remains hawkish and was insensitive to the risk of slowdown in growth.

Investors were further spooked after the Fed raised the rate by another 25bp after the FOMC meeting in December.

Since then, nerves have calmed after the Fed repeatedly pressed home its dovish message. During a press conference in December, Powell mentioned that the Fed could afford to be patient on rate hikes if inflation stays below 2%.

Now, financial markets are confronted with the prospects of a protracted shutdown due to animosity between President Trump and Democrats controlled House of Representatives.

“A lengthy shutdown could damage consumer sentiment and retail sales, moderating growth in the real economy,” says Koh, meaning the stock market could resume its choppy flight path after the relief rally.

A successful trade deal between the US and China could extend the relief rally. However, geopolitical headwinds could return thereafter.

Meanwhile, the research house expects DBS, OCBC and UOB to provide attractive 2019 dividend yields of 4.8%, 4.1% and 4.8% respectively, thanks to the finalisation of Basel III reforms in Dec 17 has paved the way for banks to hike their dividend payout ratios.

As at 2.23pm, shares in DBS are trading at $25.17 or 11.1 times FY19F earnings while shares in OCBC are trading at $11.78 or 10.9 times FY19F earnings.