UOB Kay Hian 2015-08-04: Sector Update - Singapore Banks 2Q15 Round-up: NIM Expansion And Strong Growth In Fee Income.

2Q15 Round-up: NIM Expansion And Strong Growth In Fee Income 


  • Good results from DBS and OCBC beat expectations. 
  • We saw expansion in net interest margin, strong growth in fee income and resiliency in asset quality. 
  • We are gratified that OCBC is catching up with peers in capital adequacy. 
  • Maintain OVERWEIGHT as Singapore banks are resilient and Singapore is a safe haven. 
  • OCBC is our top pick, followed by DBS. 



WHAT’S NEW 


  • DBS’s and OCBC’s 2Q15 results beat expectations. Unfortunately, UOB’s were below consensus estimate. 
  • Loans contracted 0.3% qoq for DBS, flat for OCBC and down 0.5% qoq for UOB, all affected by the depreciation of regional currencies against the Singapore dollar. DBS and OCBC achieved strong yoy loan growth of 8.8% and 18.5% (3% if we exclude OCBC Wing Hang) respectively, compared to a slower 4.8% yoy for UOB. 
  • Net interest margin (NIM) DBS and OCBC expanded 6bp and 5bp to 1.75% and 1.67% respectively due to re-pricing of corporate and housing loans in Singapore. UOB’s NIM edged up only 1bp qoq as 60-70% of re-pricing was already completed in 1Q15. 
  • DBS, OCBC and UOB achieved strong yoy growth in fee income of 15.7%, 24.1% and 13.4% respectively. Wealth management, credit cards and loan processing were important growth drivers for fee income for most banks. 
  • Treasury income, as reflected in net trading income, remained healthy at S$273m for DBS, S$70m for OCBC and S$114m for UOB, but sequential lower compared to the strong rebound in 1Q15. 
  • Asset quality remained resilient generally despite the weakened credit environment. OCBC saw NPL ratio increase 0.1ppt from a low base to 0.7%. OCBC and UOB reported higher NPLs from Malaysia and Indonesia. 
  • OCBC’s CET-1 CAR improved 0.5ppt qoq to 11.2% due to retained earnings, its scrip dividend scheme, reduction in risk-weighted assets and divestment of an 8.2% stake in New China Life. It has closed the gap in capital adequacy with peers (DBS: 12.3%, UOB: 12.5%). 
  • DBS and UOB have increased their interim dividends to 30 cents and 35 cents per share respectively. OCBC maintained interim dividend at 18 cents per share, having already raised its interim dividend last year.


ACTION 

  • Maintain OVERWEIGHT. The prospects for further expansion in NIM remain intact although loan growth has slowed. We expect US interest rates to normalise gradually over the next two years, which would lift SIBOR and SOR and allow loans to be re-priced higher. DBS is the prime beneficiary and OCBC should benefit as well. 
  • Regional countries face headwinds from slower economic growth and heightened political risk. Fortunately, Singapore banks have proven to be relatively more resilient. Singapore is a safe haven and has attracted capital inflows from investors in other regional countries. 


SECTOR CATALYSTS 


  • Growth in Asia. Banks’ corporate banking business will benefit from growth in intraregional trade and investments. Their consumer banking business will benefit from rising affluence in Asia. 
  • Attractive valuation. Valuations for banks are undemanding with DBS trading at 2015F P/B of 1.27x and OCBC at 1.25x. 


ASSUMPTION CHANGES 


  • As per results notes for DBS and OCBC. 


RISKS 


  • Further economic slowdown and political risks in regional countries. 



Analyst: Jonathan Koh, CFA

Source: http://research.uobkayhian.com/


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