In case you have yet to notice, we have adopted the same sub-headings in this quarter’s Singapore bank earnings preview as the previous in light of the protracted uncertainty going into the end of the year. The challenge in surmounting the Street’s estimate for local bank earnings may not be deemed as much a driver for prices as compared to the guidance and outlook to accompany the releases.
Across Asia markets, there lies multiple risks that had perhaps been well discussed in the latest annual IMF meeting in Bali. Rising trade tensions had certainly seen its impact rolling in once again following the exchange of tariffs between US and China in late September. Into December, any escalation in trade tariffs amount may further threaten China’s growth and see its impact trickle down to the rest of Asia. Meanwhile, while rising interest rates add to the profitability of the lending business, the higher borrowing costs could erode loan demand as we move into 2019 that sees little clarity at present. All the above may dull the impact from earnings, prompting the views on future quarters’ performance to potential take precedence in guiding prices.
The recent pullback does, however, increase the attractiveness of local bank stocks with favourable valuations. At 12.8x price-to-equity ratio, this is again near the 1-year lows for DBS. A similar situation cuts across the remaining two. With the gap opened between the current and 12-month target prices, it is also no surprise finding buy ratings affirmed of late. The most stable asset quality for local banks should make them comparatively favourable picks compared to regional counterparts, though the timing of any reversal would be the question.
As the first to release its Q2 results, UOB may be the best to capture the reactions, though the impact will likely ripple across the local banking sector. Prices have found support ahead of the $25 handle amid the short-term downtrend. While unlikely, any disappointments in earnings or overt pessimism from management could see prices test the support and a break here could provide further downward momentum.
On the flipside, a flip back above the $25.84 support-turned-resistance could bring prices back into the consolidation zone warranting different short-term strategies.