Banking – Singapore - UOB Kay Hian 2017-12-14: Assessing Productivity And Cost Efficiency

SGinvestors.io

Singapore Banking Stocks DBS vs OCBC vs UOB DBS GROUP HOLDINGS LTD D05.SI OVERSEA-CHINESE BANKING CORP O39.SI UNITED OVERSEAS BANK LTD U11.SI

Banking – Singapore - Assessing Productivity And Cost Efficiency

• OCBC leads in cost efficiency with the lowest staff cost per employee at S$83,333. Its other non-wage expenses are also very lean. 
• DBS leads in productivity with the highest income per employee at S$538,805 and PPoP per employee at S$313,701. However, OCBC and UOB are fast catching up in productivity. 
• Maintain OVERWEIGHT. BUY OCBC and DBS. Prefer OCBC, followed by DBS.

WHAT’S NEW

• Investments in fintech have accelerated on a global basis since 2014. In this report, we assesses if productivity and cost efficiency have improved and try to identify key drivers.

Headcount. 

• DBS has the smallest workforce at 23,114 despite:
  1. the acquisition of Societe Generale’s private banking businesses in Singapore and Hong Kong in 4Q14 and ANZ’s wealth management and retail banking businesses in 3Q17, and
  2. increase in headcount of 484 in 2016 and 1,154 in 9M17 due to insourcing of IT. 
• Conversely, OCBC had the largest headcount of 29,161 as of Sep 17. Its headcount grew 14% after it consolidated Wing Hang Bank in 3Q14. 
• UOB has kept headcount relatively unchanged as it maintains a ASEAN-centric footprint and did not partake in any major M&As.

Income per employee. 

• DBS had the most productive workforce with income per employee at S$538,805 as of 3Q17 (annualised), significantly above the S$323,465 for OCBC and S$361,289. DBS benefits from economies of scale due to its established presence in Singapore and Hong Kong with market shares estimated at 20.6% and 5% respectively. 
• OCBC’s income per employee stayed flat in 2015 and 2016, possibly held back by the integration of Wing Hang Bank, but had improved 11% ytd in 9M17. 
• UOB’s income per employee has grown steadily at an average of 2.3% annually.

Staff cost per employee. 

• DBS’ staff cost per employee is higher at S$120,830, vs S$83,333 for OCBC and S$87,620 for UOB. However, DBS’ staff cost per employee grew at a slightly slower CAGR at 3.6% for 2013-17, vs 4.8% for OCBC and 4.9% for UOB. 
• Staff cost accounted for 56% of operating expenses for DBS, vs 61.6% for OCBC and 55.3% for UOB in 9M17.

PPoP per employee. 

• DBS has the highest PPoP per employee at S$313,701, vs S$182,703 for OCBC and S$204,284 for UOB. 
• OCBC and UOB registered faster growth with PPoP per employee growing at for 2013-17 CAGR of 4.4% and 4.9% respectively, vs 2.1% for DBS.

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 Group Holdings (BUY/S$25.30/Target: S$26.10) 

• DBS grew total income at a faster 6.4% yoy in 2016 and 1.8% yoy in 9M17 (-2.2% if we exclude gains of S$350m from the divestment of PwC Building), compared with 1.5% and 0.6% for expenses respectively. The positive JAWS enabled DBS to register a 1.5ppt improvement in cost-to-income ratio (CIR) to 43.3% for 2016. CIR deteriorated by 1ppt to 44.3% in 9M17 if we adjust for gains from the divestment of PwC Building.
• DBS owns and run its own technology IT infrastructure for greater control and flexibility.
• Insourcing has increased from 15% in 2009 (outsource: 85%) to 85% in 2017 (outsource: 15%). IT expenses dropped 0.7% yoy in 2016 and 8.9% yoy in 9M17 after completing digital transformation and launching DigiBank in India in Apr 16.
• Our target price of S$26.10 is based on 1.38x 2018F P/B, derived from the Gordon Growth Model (ROE: 10.5%, COE: 8.0% (Beta: 1.1x) and Growth: 1.5%).

Oversea-Chinese Banking Corp (BUY/S$12.59/Target: S$13.56) 

• OCBC consolidated Wing Hang Bank in 3Q14. It managed to maintain CIR at 42% in 2015 despite the initial drag from OCBC Wing Hang, which had a higher CIR of 48.4%.
• OCBC NISP achieved the most significant improvement in CIR of 11.4ppt from 55.5% in 2014 to 44.1% in 9M17. OCBC has a lean cost structure. Other non-wage expenses accounted for 38.4% of total operating expenses.
• CIR deteriorated in 2016 but vastly improved in 9M17. Wealth management and life insurance fared badly in 2016 but recovered significantly in 9M17. It also trimmed headcount by 2.1% in 9M17. OCBC had the lowest CIR of 42.3% in 9M17.
• Our target price of S$13.56 is based on 1.44x 2018F P/B, derived from the Gordon Growth Model (ROE: 10.5%, COE: 7.75% (Beta: 1.05x) and Growth: 1.5%).

United Overseas Bank (NOT RATED/S$26.79) 

• Expenses grew faster than income in 2015 and 2016, resulting in deterioration in CIR.
• Growth in income picked up to 8.5% yoy in 9M17 but expense growth of 6.7% was still faster than peers (DBS: +0.6%, OCBC: +5.7%).
• IT expenses grew at a 3-year CAGR of 21.4% in 2014-16. IT expenses accounted for 9% of operating expenses in 9M17, vs 17% for DBS.

SECTOR CATALYSTS 

• Rising interest rates and bond yields.
• Easing of pressure on asset quality from the oil & gas sector.

ASSUMPTION CHANGES 

• We maintain our existing earnings forecasts.

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/ 2017-12-14

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 26.100 Same 26.100

BUY Maintain BUY 13.560 Same 13.560

NOT RATED Maintain NOT RATED 99998.000 Same 99998.000