Singapore Banking - UOB Kay Hian 2017-02-20: 4Q16 Round-up ~ Limited Downside From O&G, Upside From Rate Hikes

Banking – Singapore - UOB Kay Hian 2017-02-20: 4Q16 Round-up ~ Limited Downside From O&G, Upside From Rate Hikes Singapore Banking Sector Outlook DBS GROUP HOLDINGS LTD D05.SI OVERSEA-CHINESE BANKING CORP O39.SI UNITED OVERSEAS BANK LTD U11.SI Singapore Banks

Banking – Singapore - 4Q16 Round-up ~ Limited Downside From O&G, Upside From Rate Hikes

  • The banking sector still faces headwinds from the O&G sector in 4Q16. However, the outlook is brighter for 2017 as we believe banks have already recognised the larger troubled accounts as NPLs. 
  • Interest rates are also on an up-cycle due to the pick-up in inflation, and banks are natural beneficiaries. 
  • Maintain BUY for DBS and OCBC.
  • Maintain OVERWEIGHT.



WHAT’S NEW


UOB’s 4Q16 results stand out due to the improvement in asset quality. 

  • On the other hand, DBS’s and OCBC’s results were slightly below expectations due to higher-than-anticipated specific provisions.

Some signs of inflection for asset quality. 

  • UOB’s NPL ratio improved by 14bp qoq to 1.47%. DBS and OCBC continued to experience an up-tick in NPL ratio, which deteriorated by 13bp and 7bp qoq respectively. 80-90% of new NPLs came from the O&G sector.
  • Specific provisions were elevated at S$432m for DBS, S$235m for OCBC and S$482m for UOB due to the steep fall in valuations for collaterals. UOB offset the huge negative impact with write-back in general provisions of S$310m.
  • Loan-loss coverage are 96.9% for DBS, 100% for OCBC and 118% for UOB. DBS will set aside the gain of S$350m from the divestment of PwC Building as general provisions, thus beefing up loan-loss coverage to 104% in 1Q17.

Pullback in NIM has bottomed. 

  • NIMs were generally stable at 1.63% for OCBC and 1.69% for UOB. We see the 6bp qoq NIM compression of DBS as a temporary dip due to excess deposits. 
  • NIMs would gradually inch higher due to the up-cycle in US interest rates, which will also pull SIBOR and SOR higher in Singapore.

Steady growth in fees. 

  • DBS, OCBC and UOB grew fee income by 6.2%, 4.5% and 10.6% yoy respectively. Wealth management and credit cards were key growth drivers.
  • DBS experienced a steep 16% qoq decline in fees due to seasonal weakness for investment banking and wealth management.

Trimming expenses. 

  • Operating expenses were reduced by 1.5% yoy at DBS and 0.7% yoy at UOB (OCBC: +0.6% yoy). 
  • DBS cut IT-related expenses by 23% yoy due to insourcing of technology function. 
  • For UOB, staff costs declined 1.6% yoy in 4Q16 with head count trimmed by 172 or 0.7% in 2016.

Well capitalised. 

  • DBS has the highest CET-1 CAR of 13.3%, followed by 12.4% for OCBC and 12.1% for UOB.


ACTION 


  • Maintain OVERWEIGHT. Headwinds from the O&G sector would diminish as we believe Singapore banks have already recognised the larger troubled accounts from the O&G sector as NPLS. Higher interest rates and bond yields are also positive for banks.
  • DBS and OCBC trade at 2017F P/B of 1.03x and 1.05x, which is near 1xSD and 2xSD respectively below long-term means. They also provide decent dividend yields of 3.2% and 3.8% respectively.


SECTOR CATALYSTS 

  • Rising interest rates and bond yields.
  • Easing of pressure on asset quality from the O&G sector.
  • Decent 2017F dividend yield of 3.2% for DBS and 3.8% for OCBC.


ASSUMPTION CHANGES 



RISKS 

  • Outbreak of trade war between China and the US.
  • Further economic slowdown and political risks in regional countries.



Singapore Banks Peer Comparison


Singapore Banks 4Q16 Profit & Loss



Jonathan Koh CFA UOB Kay Hian | http://research.uobkayhian.com/ 2017-02-20
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 21.500 Same 21.500
BUY Maintain BUY 10.750 Same 10.750
NOT RATED Maintain NOT RATED 99998.000 Same 99998.000



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