SINGAPORE (March 22): Macquarie Securities Group is maintaining its positive view on Singapore banks, having DBS as its top pick with "outperform" rating and S$21 target price.

In a Tuesday report, Macquarie expects positive loan-loss provision surprises to drive further rerating. Its research team also expects better asset quality and lower provisions to drive further EPS upgrades this year.

More importantly, the non-Oil & Gas portfolio of the three banks seems to be holding up well while outlook for externally-oriented sectors has been improving. Domestic-oriented sectors too have not worsened. More importantly, Ezra-related losses seem to be limited.

(See also: Ezra Holdings files for US bankruptcy)

The exposure to Ezra is US$328 million for DBS, US$280 million for OCBC and S$33 million for UOB, according to media reports.

“We believe banks have already made the bulk of provisions required in 2H16,” says lead analyst Ken Ang in a Tuesday report.

Macquarie also estimates costs to surprise positively by 5-10% over five years from shortening of banking processes from digitisation.

Meanwhile, Ang says Singapore banks have been showing consensus EPS upgrades since its Sept 2016 trough, driven by better NIMs, trading income and lower costs.

Looking ahead, he expects NIM expansion from Fed fund rate hikes to be positive, but muted though.

“We are buyers of Singapore banks on inexpensive valuations, and having the most positive consensus EPS trends among Asean banks,” says Ang, “Dividend yields are attractive at at about 3-4%, and could increase post Basel IV clarifications.”

Macquarie has an “outperform” on OCBC with a S$10.00 target price, but is “neutral” on UOB with S$20.50 target price.

Shares of DBS, OCBC and UOB were trading lower at S$18.69, S$9.49 and S$21.52 respectively at noon market break today.