Banks - RHB Research 2015-10-15: Asset Quality The Key Focus Of 3Q15 Results

Banks - RHB Research 2015-10-15: Asset Quality The Key Focus Of 3Q15 Results Singapore Banks DBS GROUP HOLDINGS LTD D05.SI  OVERSEA-CHINESE BANKING CORP O39.SI  UNITED OVERSEAS BANK LTD U11.SI 

Banks - Asset Quality The Key Focus Of 3Q15 Results 

  • SG Banks are expected to report a 4.5% QoQ decline in 3Q15 net profit mainly due to lower investment gains and higher loan provisions. 
  • We do not expect any negative surprises but would be keeping an eye on asset quality trends and management guidance on this front. 
  • We cut earnings projections by 2-5% and revise TPs on lower ROEs and higher market risk premium. 
  • DBS is our preferred pick. 

 Banks’ 3Q15 results begin on 28 Oct. 

  • Oversea-Chinese Banking Corporation (OCBC) is expected to kick-start Singapore banks’ (SG Banks) 3Q15 results reporting on 28 Oct. This would be followed by United Overseas Bank (UOB) on 30 Oct and DBS Group (DBS) on 2 Nov. 
  • Broadly, we expect a sector net profit of SGD2.79bn, down 4.5% QoQ /up 3% YoY. The sequential decline follows strong investment gains in 2Q15 and an expected rise in impairment charges in 3Q15. We do not expect any negative surprises. 

 Earnings drivers weaker. 

  • Loans are projected to grow 1-2% QoQ in 3Q15, after a flattish 2Q15 (-0.2% QoQ). The increase would be moderate given Singapore’s sluggish property market, slowing China trade loans, and weak loan demand in ASEAN markets. Net interest margins (NIMs) are expected to be stable as the renewed rise in Singapore’s short term rates from mid-Sept would more likely lift margins in 4Q15. 
  • We see a QoQ decline in non-interest income (non-II) as rising bond yields would impact investment gains, which were exceptionally high in 2Q15. With loan provisions expected to normalise in 2H15, credit costs are also expected to tick-up QoQ. 

 Asset quality relatively stable. 

  • Key focus of 3Q15 results would be asset quality trends. Although the banks have not revised guidance on non-performing loans (NPLs), they do expect asset quality deterioration over the next few quarters. We believe the rise in impaired loans would be moderate due to SG Banks’ stringent credit risk management. 

 Forecasts and TPs lowered. 

  • Taking into account a softer-than-expected operating income growth and factoring in higher loan provisions, we revised earnings for all three banks down by 2-3.5% for 2015F and 2-5% for 2016F. 
  • Our TPs are trimmed after adjusting the lower ROEs and higher market risk premium. 

 Share prices rebounded, still underperformed the STI. 

  • SG Banks had a nice rebound in share prices in early-Oct, reducing YTD losses from 20% on 2 Oct to 14% on 14 Oct. Still, bank stocks have underperformed the market due to investor concerns over asset quality. 
  • DBS is our preferred pick with a key positive price catalyst expected to come from US interest rate lift-off. 
  • OCBC is a BUY given its superior asset quality while we are NEUTRAL on UOB, where high exposures to ASEAN and the property segment are areas of concern. 

Singapore Research RHB Securities | http://www.rhbgroub.com/ 2015-10-15

Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 21.10 Down 23.30
BUY Maintain BUY 10.90 Down 11.70
NEUTRAL Maintain NEUTRAL 21.70 Down 24.30