DBS Vickers 2015-08-25: Singapore Banks - In bear mode.

Singapore Banks

In bear mode 

  • FY15F earnings face 1-4% declines from current levels; loan growth may slip slightly for the rest of the year while provisions may inch up; NIM should stay intact as long as SIBOR stays high (currently: 1.0%) 
  • Risk on 2016 assumptions with slower GDP; cut FY16-17F earnings by 5-6% after moderating loan growth and asset quality assumptions with higher risk premium 
  • Our revised base case : OCBC’s TP lowered to S$10.00 (1.1x FY16F BV), UOB cut to S$19.20 (1.0x FY16F BV); OCBC remains a BUY, UOB a HOLD 
  • Bear case TPs :reversion to GFC loan growth and asset quality assumptions with higher risk premium would result in slight downside to OCBC (S$8.20, 0.9x FY16F BV, -6% downside) a larger downside for UOB (S$16.20, 0.8x FY16F BV, -13% downside) in the near term 

Slower earnings growth for FY15F. 

  • High SIBOR would keep NIM at bay although we are discounting further upside to NIM from current levels. However, loan growth may falter slightly for the rest of the year, prompting us to trim our FY15F loan growth by 1-2ppts, resulting in a sub-5% loan growth on average for the banks. We raised NPL ratio by 10bps but with a slight change in provision charge-off rate. These resulted in a 1-4% reduction to our FY15F earnings. 

Cut FY16F earnings by 5-6% to reflect slower macro outlook; 

  • OCBC remains a BUY. Our revised base case for 2016 reflects a slower macro outlook (2016F GDP: 2.9%) with a slight dent to asset quality. We moderated FY16F loan growth to 5% from 7%, while we assume credit cost rises closer to a 10-year average level of 28bps from 25bps. We have also assumed NPL ratio increases by 20bps to 1.2% (from 1.0%). These result in FY16-17F earnings cuts of 5-6%, bringing our forecasts slightly below consensus. 
  • Slapping an additional 100bps to our risk premium assumption, our revised base case TP for OCBC is now S$10.00 which remains a BUY (15% upside), while UOB’s TP is now S$19.20, still a HOLD (4% upside). 

If things get far worse... 

  • Should global macro fundamentals deteriorate significantly, we would reference against the GFC scenario in 2008-09, our FY16F loan growth would be a parallel comparison to FY09; asset quality indicators would be close to the FY08-09 average but excluding the effect of CDOs (collateralised debt obligations) and the Middle Eastern crisis. 
  • Our asset quality forecasts reflect weakness in the banks’ operations in ASEAN (OCBC: 20%, UOB: 21% of pretax profit) and Greater China (OCBC: 19%, UOB: 10% of pretax profit). 
  • This would result in 21-24% downside to our FY16F earnings resulting in a Bear case TP for OCBC of S$8.20 (0.9x FY16F BV) and UOB of S$16.20 (0.8x FY16BV), implying tactical HOLD and FULLY VALUED calls respectively.

LIM Sue Lin | http://www.dbsvickers.com/ DBS Securities 2015-08-14
HOLD Maintain BUY 19.20 Same 25.50
BUY Maintain BUY 10.00 Down 12.80