Citi's buy-rated DBS falls further than downgraded OCBC on the second day of Singapore bank selling

Over the two sessions, OCBC is down at least 9.1 per cent: more than 5 per cent on Wednesday, then 4.29 per cent on Thursday ^[19]. The S$29 close is S$1.50, or about 5 per cent, above the S$27.50 target Citi set with its sell call ^[3][7][20]. Working back from those moves, the stock closed above S$31.89 before Wednesday. That means the market has already covered more than 65 per cent of the distance from there to Citi's target ^[21].

Glenn Thum of Phillip Securities Research said OCBC had been priced for good news after gaining about 60 per cent this year, leaving little room for disappointment, CNA reported ^[10]. If that 60 per cent was measured before the sell-off, two days cut the year's gain to roughly 45 per cent ^[22].

Citi's ratings did not predict the order of Thursday's losses. UOB, already a Citi sell but one Citi prefers to OCBC, fell 5.16 per cent. DBS, still a Citi buy, fell 4.7 per cent. OCBC, the stock actually downgraded, fell least ^[5][7][23].

Citi's case against OCBC applies to the other two banks as well. Citi said the market may be giving OCBC too much credit for what higher interest rates and stronger loan growth would do for it ^[13]. Tay Wee Kuang of CGS International made the same point about the whole sector. He said higher funding costs could temper expectations for banks' net interest margins, and that competition for quality loans could limit how much banks can charge borrowers ^[12].

I think that funding argument also explains why UOB fell hardest. A bank that earns more of its revenue from the lending spread loses more while deposit costs rise ahead of loan yields. Net interest income is 66 per cent of UOB's revenue, against about 58 per cent at DBS and OCBC, according to Macquarie's Jayden Vantarakis ^[18].

If OCBC reports the flat quarter Citi expects and the margin squeeze shows up at DBS and UOB as well, two days of sector-wide selling priced it correctly. If OCBC beats the forecast, the drop was mostly what Vantarakis described: investors taking profits after record prices and becoming more risk averse ^[15]. A third path is a soft quarter now and a rate benefit later, once loans reprice.

I think the first is closer. Joanna Cheah of Jefferies said Singapore banks had been trading at historically elevated valuations, and that investors are questioning whether OCBC's exceptionally strong second quarter can be repeated ^[14]. The counter-case is that profit-taking after a record run would produce the same across-the-board moves with no change in earnings, and two days of prices cannot tell the two explanations apart. The view is wrong if DBS and UOB report third-quarter net interest margins that hold or widen while banks are still competing for fixed deposits ^[11].