Singapore Banking - UOB Kay Hian 2017-06-08: DBS Outperforms On Flawless Execution And Stronger Growth

Banking – Singapore - UOB Kay Hian 2017-06-08: DBS Outperforms On Flawless Execution And Stronger Growth Singapore Banks NPL Non-Performing Loans PPoP pre-provision operating profit DBS GROUP HOLDINGS LTD D05.SI UNITED OVERSEAS BANK LTD U11.SI OVERSEA-CHINESE BANKING CORP O39.SI

Banking – Singapore - DBS Outperforms On Flawless Execution And Stronger Growth

  • DBS generated the highest pre-provision operating profit (PPoP) growth with a 3-year CAGR of 8% (OCBC: 6.8%, UOB: 4.5%) and the highest PPoP/gross loans of 220bp in 2016 (OCBC: 214bp, UOB: 202bp). Its PPoP/gross loans is on an uptrend too. 
  • While OCBC is more conservative to recognise more NPLs, DBS is more proactive to write off and clean up NPLs.
  • Maintain OVERWEIGHT. 
  • BUY DBS (Target Price: S$23.30) and OCBC (Target Price: S$11.70).



WHAT’S NEW

  • We reviewed the performance of the three Singapore banks based on: 
    1. asset quality, and 
    2. ability to generate growth in pre-provision operating profit (PPoP).

NPL formation higher at OCBC. 

  • NPL formation at DBS surged from 49bp in 2015 to 120bp in 2016 due to deterioration in asset quality from the oil & gas (O&G) sector.
  • OCBC recognised NPLs from the O&G sector early since 3Q15. Thus, its NPL formation was relatively higher at 93bp in 2015 but relatively lower at 106bp in 2016. 
  • DBS’s NPL formation is lower at 85bp compared to OCBC’s 99bp if we compare the average NPL formation for 2015 and 2016.

Write-offs heavier at DBS. 

  • OCBC achieved a high average recoveries and upgrades of 47bp during 2014-16. Conversely, DBS’s was lower at 21bp, but its write-offs were heavier at 30bp. 
  • Overall, OCBC is more conservative in recognising more NPLs but DBS is more proactive to write off and clean up NPLs.

Fastest PPoP growth at DBS. 

  • DBS generated the highest PPoP growth with a 3-year CAGR of 8%, vs 6.8% for OCBC and 4.5% for UOB.
  • We use PPoP/gross loans as an indicator of resiliency to withstand shocks from deterioration in asset quality. DBS had the highest PPoP/gross loans at 220bp in 2016 (OCBC: 214bp, UOB: 202bp) and 260bp in 1Q17 (OCBC: 225bp, UOB: 205bp). Also, DBS’s PPoP/gross loans is on an uptrend, compared to a downtrend for OCBC and UOB.
  • For 1Q17, DBS' PPoP/gross loans would be slightly lower at 214.1bp if we exclude gain of S$350m from the disposal of PwC Building.
  • In terms of income mix, DBS’s reliance of net interest income is high at about 65% because its surplus deposits have been deployed in productive loans. OCBC has a broader base in non-interest income due to its insurance arm, Great Eastern. UOB has strong contribution from fee income, at 24% of total income.




ACTION


DBS outperforms in delivery and execution. 

  • DBS has executed well to generate higher growth in PPoP and its asset quality is not necessarily inferior. It is also more sensitive to higher US interest rates, which filters down to higher interest rates in both Singapore and Hong Kong. 
  • DBS is also reviewing its dividend policy for a potential increase in payout as its CET-1 CAR has reached a new high of 14.2%.

Maintain OVERWEIGHT. 

  • From a fundamentals perspective, banks will benefit from rising interest rates. 
  • DBS and OCBC trade at 2017F P/B of 1.10x and 1.18x, which are 18% and 29% respectively below their long-term mean of 1.34x and 1.66x. They also provide decent dividend yields of 2.9% and 3.4% 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 2.9% for DBS and 3.4% for OCBC.


ASSUMPTION CHANGES

  • We maintain our earnings forecasts.


RISKS

  • Rapid increase in the Fed funds target rate (steep rate hikes) that may trigger capital outflows from countries in Southeast Asia.








Jonathan Koh CFA UOB Kay Hian | http://research.uobkayhian.com/ 2017-06-08
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 23.300 Same 23.300
NOT RATED Maintain NOT RATED 99998.000 Same 99998.000
BUY Maintain BUY 11.700 Same 11.700



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