DBS GROUP HOLDINGS LTD
D05.SI
OVERSEA-CHINESE BANKING CORP
O39.SI
UNITED OVERSEAS BANK LTD
U11.SI
Banking – Singapore - 3Q17 Round-up: DBS Leads In Transition To FRS 109
- Healthy results were seen from Singapore banks with net interest income expanding 9-14% yoy and fees growing 12-14% yoy.
- DBS cleaned up its exposure to O&G support services by recognising additional NPLs of S$1,741m. It wrote back S$850m in surplus general provisions above MAS and FRS 109 requirements to cushion the rapid increase in specific provisions.
- Maintain OVERWEIGHT.
- OCBC is our preferred BUY (Target: S$13.56), followed by DBS (Target: S$24.40).
WHAT’S NEW
- OCBC’s and UOB’s 3Q17 results beat expectations, while DBS’ results were below expectations.
Loan growth generally accelerated.
- DBS achieved loan growth of 3.7% qoq, boosted by consolidation of ANZ wealth management and retail banking operations. Excluding ANZ, DBS’ loan growth would be 1.9% qoq. UOB’s loan growth reversed from a contraction of 0.6% qoq in 2Q17 to an expansion of 2.8% qoq.
NIMs on an upward trend.
- UOB achieved NIM expansion of 4bp qoq on improved yield from extending the duration of investment securities. OCBC’s NIM improved 1bp qoq, aided by the narrowing gap between 1M- and 3M-HIBOR from 31bp to 20bp during the quarter.
- NIM expansion helped OCBC and UOB achieve double-digit growth in net interest income of 12% and 14.5% yoy respectively.
Double-digit growth in fees.
- DBS, OCBC and UOB achieved double-digit growth in fees of 11.6% yoy, 14.0% yoy and 12.0% yoy respectively. Their wealth management fees also grew 35%, 32% and 40% yoy respectively.
- Fund management was another source of growth. OCBC’s and UOB’s fund management fees grew 11% and 15% yoy respectively. DBS and UOB’s card fees grew 13% and 11% yoy respectively.
Addressing concerns on exposure to the O&G sector.
- DBS’ NPL balance increased a massive 24.1% qoq as it recognised additional NPLs of S$1,741m from oil & gas (O&G) support services. The accelerated recognition of residual weak O&G support services exposure as NPLs removes uncertainties over asset quality.
- UOB’s NPL balance also increased 8.1% qoq as it recognised a lumpy O&G exposure as a NPL.
DBS leverages on transition to FRS 109 to clean up its O&G book.
- DBS’ credit cost at 104.1bp (212.7bp if we adjust for write-back in general provisions of S$850m) was significantly higher than OCBC’s 27.1bp and UOB’s 38.3bp. DBS’ massive specific provisions of S$1,538m were partially offset by the write-back in general provisions of S$850m, which are surplus and above MAS and FRS 109 requirements.
Rock solid capital base.
- DBS and UOB are extremely well capitalised with CET-1 CAR at 13.6% and 13.8% respectively. OCBC’s CET-1 CAR is lower at 12.0% but could be boosted if it divests 30% of Great Eastern (Malaysia) through an IPO.
ACTION
Maintain OVERWEIGHT.
- The normalisation of central banks’ balance sheets coupled with resilient global growth could energise banks’ share prices and lift their valuations towards and above their mid-cycle valuations. Deregulation for banks and efforts towards reducing the corporate tax rate in the US also add to the positive sentiments.
- DBS and OCBC trade at 2017F P/B of 1.30x and 1.33x, which is below their long-term means. They provide upside of 2.3% and 23.3% respectively if they trade towards the long-term mean P/B of 1.33x and 1.64x. They also provide decent dividend yield of 2.9% and 3.1% respectively.
SECTOR CATALYSTS
- Rising interest rates and bond yields.
- Easing of pressure on asset quality from the O&G sector, which would result in lower credit costs in 2018 and 2019.
ASSUMPTION CHANGES
- For 2017, we have raised our net profit forecast for OCBC by 2.5% but cut our net profit forecast for DBS by 4.9%.
RISKS
- Rapid increase in the federal 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/
2017-11-07
UOB Kay Hian
SGX Stock
Analyst Report
24.40
Down
24.480
13.560
Same
13.560
99998.000
Same
99998.000
