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.
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.
- 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.
- DBS has the highest CET-1 CAR of 13.3%, followed by 12.4% for OCBC and 12.1% for UOB.
- 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.
- 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.
- As per results notes for DBS (DBS Group Holdings (DBS SP) - 4Q16 Lightning Never Strikes Twice) and OCBC (Oversea-Chinese Banking Corp (OCBC SP) - 4Q16 The Long And Thorny Road To Recovery).
- Outbreak of trade war between China and the US.
- Further economic slowdown and political risks in regional countries.