Singapore Banks - No Change In Fundamentals
Singapore Banks Sentiment driven rally; Reiterate sector Negative
- Since Trump’s victory in Nov-16, Singapore banks have rallied ~8-18% on expectation US fed fund rate will normalize, and due to oil and USD strength. But fundamentally, our outlook has not changed.
- In fact, Oct system data further validates our negative view on the sector. System loans contracted 2.2% YoY in Oct-16, its longest streak of contraction since 2005. System NPL ratio rose to 2.1% as of Sep’16 (Sep’15: 1.5%).
- Over the next few quarters at least, we think banks will focus on driving revenue and cost containment as asset quality is worsening (link).
Cautious lending, normalization of rates
- We think loan pricing in Singapore will remain competitive for Singapore banks to retain or gain market share, as they were lending out faster at 4-5% YoY growth vs system’s -5% as of Sep.
- Overall, we estimate 0-2% loan growth in FY17 for Singapore banks as we believe:
- banks will be cautious in their lending and will only work with customers whom they are familiar with; and
- lackluster lending environment.
- Post-Trump’s victory, 3M SIBOR and 3M SOR rose by ~5bps and ~6bps respectively. The main bulk of banks’ Singapore loan book is pegged to floating rates. Going forward, we expect SIBOR to rise by ~25bps each for FY17-18E, and NIMs to remain stable or expand slightly across the banks. If banks’ NIM rises by 5bps from our FY17E NIM estimate, we estimate FY17E net profits will increase by 3-5%, ceteris paribus.
Credit quality deterioration not over
- Amid sluggish growth and a rising interest rate environment, we believe default risks could be higher. Our FY17E and FY18E provision estimate for the three banks is 14-25% and 8-20% higher than consensus. We estimate credit costs to be 39-44bps on average for Singapore banks from FY16- 18E.
- Our estimates could be at risk should there be more recoveries or if credit costs are more benign than what we expected, as banks can have varying standards in their loan-loss methodologies. If we reduce our FY17E credit cost estimate by 10bps, we estimate banks’ FY17E net profits will increase by c.6-7%, ceteris paribus.
DBS TP raised; Prefer UOB
- We revised our cost assumptions for DBS in light of 3Q16 cost-income ratio (CIR) guidance by management and recent news of further cost rationalization by the bank. Our CIR has been revised from ~45-47% to ~44% for FY16-18E. Our net profit forecasts are revised up by ~2-7% for FY16-18E. Our TP for DBS is raised by 8% to SGD15.68.
- But of the three banks under coverage, we prefer UOB for its lower exposure to O&G and China. UOB appears to be more conservative and best cushioned to absorb further losses from asset quality deterioration.
- Key risks to our call would be:
- higher interest income;
- higher non-II; and
- better-than-expected credit costs.