Singapore Banking - UOB Kay Hian 2016-11-01: 3Q16 Round-up: Bulk Of Vulnerable And Lumpy Exposure Already Recognised As NPLs

Singapore Banking - UOB Kay Hian 2016-11-01: 3Q16 Round-up: Bulk Of Vulnerable And Lumpy Exposure Already Recognised As NPLs OCBC OVERSEA-CHINESE BANKING CORP O39.SI  DBS GROUP HOLDINGS LTD D05.SI  UNITED OVERSEAS BANK LTD U11.SI 

Singapore Banking - 3Q16 Round-up: Bulk Of Vulnerable And Lumpy Exposure Already Recognised As NPLs

  • 3Q16 results were characterised by NIM compression, robust non-interest income and renewed awareness to trim expenses. 
  • DBS and UOB experienced hefty up-ticks in new NPLs but expect NPL formations to moderate going forward. 
  • Maintain OVERWEIGHT. 
  • We prefer OCBC due to its conservative approach to recognise NPLs early, followed by DBS.



WHAT’S NEW


Both DBS’ and OCBC’s 3Q16 results were above expectations.

  • Turning around to positive qoq loan growth. DBS and OCBC registered qoq loan growth of 1.9% and 1.5% respectively as trade loans have stabilised. (DBS: -0.5% and OCBC: -2.5% for 1H16) UOB registered the strongest loan growth of 7% yoy as it has traditionally been less reliant on trade loans.
  • NIMs were down 10bp for DBS and 6bp for OCBC due to the steep correction in SIBOR and SOR. UOB’s NIM was relatively flat as compression occurred earlier in 2Q16. NIMs are expected to bottom in 4Q16 and stabilise thereafter.

Robust non-interest income. 

  • DBS achieved a superior growth of 18.8% yoy in fee income, vs 4.9% yoy for OCBC and 1.4% yoy for UOB. 
  • For OCBC, contribution from the insurance business normalised to S$199m in mark-to-market gains from its equity and bond portfolios. 
  • Net trading income was robust for all three banks.

Trimming expenses. 

  • Banks have started to pay more attention to cost rationalisation.
  • DBS cut operating expenses by 4.8% yoy. The increases in operating expenses have also moderated to 5.9% yoy for OCBC and 1.6% yoy for UOB.

New NPLs predominantly from O&G. 

  • NPL ratios have deteriorated by 0.2ppt for both DBS and UOB to 1.3% and 1.6% respectively due to exposure to the oil & gas (O&G) sector. The deterioration in asset quality for OCBC was mild as there were upgrades to restructured NPLS which were recognised early last year.
  • DBS and UOB expect NPL formation to moderate going forward. OCBC expects another two quarters of stress in asset quality.

Well capitalised. 

  • DBS has the highest CET-1 CAR of 13.5%, followed by 12.8% for OCBC and 12.4% for UOB.


ACTION


Maintain OVERWEIGHT. 

  • Banks are likely to have already recognised most vulnerable large/lumpy exposure to the O&G sector as NPLs. While asset quality remains under pressure and negotiation for refinancing are on-going, we think NPL formation should moderate going forward.


SECTOR CATALYSTS


Sluggish economic growth. 

  • Banks are confronted with an extended period of sluggish growth, especially in Singapore. They have to stay prudent and conservative to weather this period of anaemic growth.

Attractive valuations. 

  • Valuations for banks are undemanding with DBS trading at 2017F P/B of 0.83x (1SD below mean) and OCBC at 0.95x (2SD below mean). The sector provides an attractive dividend yield of about 4%.


ASSUMPTION CHANGES

  • As per our results notes for DBS and OCBC.


RISKS

  • Further economic slowdown and political risks in regional countries.


PEER COMPARISON






Jonathan Koh CFA UOB Kay Hian | http://research.uobkayhian.com/ 2016-11-01
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 10.450 Same 10.450
BUY Maintain BUY 18.98 Up 17.80
NOT RATED Maintain NOT RATED 99998 Same 99998




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