Banking – Singapore - UOB Kay Hian 2016-11-28: Positive News From The O&G Sector

Banking – Singapore - UOB Kay Hian 2016-11-28: Positive News From The O&G Sector OCBC OVERSEA-CHINESE BANKING CORP O39.SI  DBS GROUP HOLDINGS LTD D05.SI  UNITED OVERSEAS BANK LTD U11.SI 

Banking – Singapore - Positive News From The O&G Sector

  • Managements at both DBS and UOB have indicated that large and vulnerable accounts in the O&G sector have already been recognised as NPLs and further increase in NPLs would be manageable. 
  • The two new measures unveiled by the government last Friday would also bring relief to cash-strapped SMEs. 
  • The slight rebound in SIBOR and SOR would stabilise NIM. 
  • Maintain BUY for both DBS and OCBC. Maintain OVERWEIGHT.



WHAT’S NEW


Over the hump. 

  • We believe Singapore banks have already recognised the larger troubled accounts from the oil & gas (O&G) sector as NPLs. 
  • During the recent results season, management at DBS indicated expectations that NPL formation should be more “granular” (smaller) going forward. 
  • Similarly, management at UOB has identified marginal players in the O&G sector through its regular stress tests and has already classified a majority of these vulnerable accounts as NPLs. They expect new NPLs to normalise and taper off in subsequent quarters.

Conservatively recognising more NPLs. 

  • Assuming all NPLs within the O&G sector occur in the offshore support services (OSS) segment, we estimate that DBS, OCBC and UOB have recognised 15.1% (previous: 10.1%), 21.5% (previous: 16.4%) and 31.1% (previous: 17.1%) respectively of loans extended to the OSS segment as NPLs.

Help is on the way. 

  • The Ministry of Trade & Industry has announced two measures to help marine and offshore engineering (M&OE) companies: 
    1. the Internationalisation Finance Scheme has been enhanced to increase loan quantum from S$30m to S$70m per borrower group. The funds could be utilised for purchase of assets, project financing or M&As, and 
    2. bridging loans for working capital have been re-introduced with maximum loan quantum set at S$5m for each eligible company and S$15m for each borrower group, with loan tenure of up to six years. The government will assume 70% of the risk-share for both loan assistance schemes.
  • We believe these measures were undertaken to preserve jobs in the M&OE industry, which are being threatened by rising corporate defaults. They are one-off measures intended to stabilise the M&OE industry and help viable companies build core capabilities to preserve competitiveness. 
  • Bridging loans would be particularly useful for SMEs that face short-term cash flow constraints. The two schemes would be available starting December and loans of S$1.6b are expected to be disbursed over the next one year.

Higher US interest rates on the card. 

  • US GDP growth accelerated to 2.9% in 3Q16.
  • Other positive indicators include strong non-farm payroll, increase in durable goods orders and improved consumer sentiment, especially after Donald Trump’s election win. Most Fed officials believe it is appropriate to raise interest rates fairly soon. The odds for a rate hike in mid-December have increased to more than 90%.

Only marginal impact on SIBOR and SOR thus far. 

  • 3-month SOR is usually more volatile and has nudged higher by 13bp to 0.79%. 3-month SIBOR has been relatively stable, inching up by only 5bp to 0.92%. 
  • Higher SIBOR and SOR would help stabilise NIM for Singapore banks after two quarters of compression in 2Q16 and 3Q16.


ACTION


Steepening of yield curve positive for banks. 

  • President-Elect Donald Trump’s intention to boost infrastructure spending, cut taxes and reduce regulations has rekindled expectations of stronger economic growth and higher inflation. Bond yields have risen and yield curves in both the US and Singapore have steepened.
  • Whether expectations of stronger growth and higher inflation are realised would depend on whether the new President is able to implement new policies to make America stronger. A pick-up in economic growth, if it materialises, would translate to stronger growth for loans and fees and improvement in asset quality for banks.

Expectations of higher interest rates would also trigger NIM expansion, especially for DBS.

  • Maintain OVERWEIGHT. We believe current share prices for banks have already built in expectations of credit losses from the O&G sector. 
  • DBS and OCBC trade at 2017F P/Bs of 0.94x and 1.00x, which is 1x SD and 2x SD respectively below their long-term means. They provide attractive dividend yields of 3.5 and 4.0% respectively.

DBS Group Holdings (BUY/S$17.05/Target: S$20.15).

  • DBS has registered the fastest organic growth with PPoP expanding 19.3% yoy in 3Q16.
  • We have reduced the penalty we imposed on DBS as the credit cycle caused by downturn in the O&G sector is near its trough. 
  • We have raised our target price from S$18.98 to S$20.15 based on 1.12x 2017F P/B, which is derived from the Gordon Growth Model (ROE: 9.2%, COE: 8.25% (Beta: lowered from 1.25x to 1.15x) and Growth: 0.0%).

Oversea-Chinese Banking Corp (BUY/S$8.89/Target: S$10.45).

  • The deterioration in OCBC’s asset quality was mild as new NPLs were offset by upgrades for loans conservatively recognised as NPLs last year.
  • Our target price of S$10.45 is based on 1.17x 2017F P/B, which is derived from the Gordon Growth Model (ROE: 9.1%, COE: 7.75% (Beta: 1.05x) and Growth: 0.0%).

United Overseas Bank (NOT RATED/S$19.88).

  • UOB has the least exposure to the O&G sector. Loans extended to the O&G sector amounted to S$9.2b or 4.2% of total loans, compared with DBS’ S$16b (5.4% of total loans) and OCBC’s $12.2b (5.9% of total loans).
  • UOB is more resilient and well positioned to weather the current credit cycle.


SECTOR CATALYSTS

  • Economic growth has slowed in both Southeast Asia and China.
  • Attractive valuations. DBS is trading at 0.94x 2017F P/B (GFC: 0.67x) and OCBC at 1.00x 2016F P/B (GFC: 0.83x). Thus, downside is limited for OCBC as valuations are near the trough levels of the global financial crisis (GFC).


ASSUMPTION CHANGES

  • We maintain our existing earnings forecast.


RISKS

  • Further economic slowdown and political risks in regional countries.






Jonathan Koh CFA UOB Kay Hian | http://research.uobkayhian.com/ 2016-11-28
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 10.450 Same 10.450
BUY Maintain BUY 20.15 Up 18.980
NOT RATED Maintain NOT RATED 99998 Same 99998




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