Banking – Singapore - UOB Kay Hian 2017-05-11: 1Q17 Roundup ~ Easing Of Specific Provisions Across The Board

Banking – Singapore - UOB Kay Hian 2017-05-11: 1Q17 Roundup: Easing Of Specific Provisions Across The Board Singapore Banks Sector Outlook DBS GROUP HOLDINGS LTD D05.SI OVERSEA-CHINESE BANKING CORP O39.SI UNITED OVERSEAS BANK LTD U11.SI

Banking – Singapore - 1Q17 Roundup: Easing Of Specific Provisions Across The Board

  • We believe the key takeaway from 1Q17 results is the consistent feedback from all three banks that the worst in terms of NPL formation from the O&G sector is already over. 
  • Specific provisions have also eased by 35-55% qoq across the board. 
  • NIM expansion and recovery from wealth management are also positive news. 
  • Maintain OVERWEIGHT. BUY DBS and OCBC.



WHAT’S NEW


All three Singapore banks’ 1Q17 results exceeded expectations.

  • NIM expansion from DBS and UOB. DBS and UOB achieved NIM expansion of 3bp and 4bp respectively to 1.74% and 1.73%. Both banks benefitted from higher SIBOR and SOR. 
  • DBS also experienced NIM expansion in Hong Kong on higher HIBOR and an improved CASA ratio and deposit franchise.

Back to double-digit growth in fees. 

  • DBS, OCBC and UOB grew fee income by 15.9%, 28.6% and 17.3% yoy respectively.  The recovery in wealth management was an important growth driver. 
  • Fees from wealth management increased 26% at DBS, 70% at OCBC and 56% at UOB. 
  • Wealth management accounted for 30% of total fees & commission at DBS, 45% for OCBC and 25% at UOB.

DBS benefitting from investments in digitalisation. 

  • DBS has performed the best in cost containment with operating expenses declining 0.6% yoy. 
  • Conversely, OCBC’s and UOB’s operating expenses increased by 5.2% (2.8% if we exclude impact from acquisition of Barclays wealth management business) and 7% yoy respectively.

Asset quality has stabilised. 

  • NPL formation has eased for all three banks. NPL ratio improved by 1bp to 1.44% for DBS and 1.25% for OCBC. 
  • Specific provisions dropped 55% qoq for DBS, 54% qoq for OCBC and 35% qoq for UOB. 
  • All three banks gave assurance that larger troubled loans in the O&G sector have already been recognised as NPLs, and they do not expect lumpy NPLs going forward.

Well capitalised. 

  • DBS has the highest CET-1 CAR of 14.2%, followed by 12.2% for OCBC and 12.8% for UOB. 
  • DBS’ CET-1 CAR was boosted by gain of S$350m from divestment of PWC Building. Management at DBS will be conducting a review of its dividend policy as the bank has surplus capital.



ACTION 


Maintain OVERWEIGHT. 

  • Headwinds from the O&G sector have diminished as banks have already recognised the lumpy 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 1.1x and 1.17x respectively, which is still below their long-term mean. They also provide decent dividend yield of 2.9% and 3.4% respectively. 
  • DBS and OCBC provide upside of 21.8% and 41.9% respectively if they trade towards long-term mean P/B of 1.34x and 1.66x.


SECTOR CATALYSTS 

  • Rising interest rates and bond yields.
  • Easing of pressure on asset quality from the O&G sector.
  • Decent 2017F dividend yield of 2.9% for DBS and 3.4% for OCBC.


ASSUMPTION CHANGES 



RISKS 

  • Further economic slowdown and political risks in regional countries.







Jonathan Koh CFA UOB Kay Hian | http://research.uobkayhian.com/ 2017-05-11
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 23.500 Same 23.500
BUY Maintain BUY 11.700 Same 11.700
NOT RATED Maintain NOT RATED 99998.000 Same 99998.000



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