Banks - CIMB Research 2015-11-02: Weak investment markets, rising credit costs

Banks - CIMB Research 2015-11-02: Banks Weak investment markets, rising credit costs Singapore Banks DBS GROUP HOLDINGS LTD D05.SI  OVERSEA-CHINESE BANKING CORP O39.SI  UNITED OVERSEAS BANK LTD U11.SI 

Banks - Weak investment markets, rising credit costs 

  • The 3Q15 results season featured slowing loan growth, minor expansion in lending spreads, weak capital market-related fees and rising credit costs. 
  • In our universe, UOB delivered steepest earnings outperformance in 3Q15, mainly from one-off investment gains. DBS and OCBC were in line with our expectations. 
  • Ahead, trade loans are likely to slow significantly. Domestic and regional loan demand looks muted. Credit creation hinges on recovery in ASEAN infra rollout. 
  • Rising credit cost likely prominent in 2016. OCBC had a large LLP spike in 3Q15 and we expect the others to follow. Our order of preference: OCBC, DBS, UOB. 


Slowing loan growth, rising customer spread 

  • Common NII features were slowing loan growth and mild expansion in customer lending spreads. FX swings corrupted headline loan growth. DBS’s underlying loans fell 1% qoq on lower trade loans but a strong US$/HK$ helped deliver headline growth of +1.8%. 
  • Underlying loan growth was stronger for OCBC and UOB but headline was dampened by weak ASEAN currencies. 
  • NIM was flat for OCBC and UOB, but DBS’s was up 3bp. Customer lending spreads rose in 3Q15 but excess liquidity was a drag for some. 

Fragile investment markets hit fees, treasury surprisingly strong 

  • The impact of the general slowdown was slightly lower trade fees. However, the heavier drag came from weak IB, WM and brokerage fees, as equity markets swooned in Aug. 
  • Sentiment recovered slightly in Oct, and guidance was that investment appetite returned slightly. We think that 2015 will prove to be a year of two halves, given the upcoming weak 4Q seasonality and rate hike uncertainties in Dec. 
  • 3Q trading was stronger than our expectations for all three banks. 

Cost ratios increased as income slowed 

  • 3Q15 cost ratios were generally higher qoq, as toplines receded. Rising overheads reflect the need to invest in digital initiatives and rising compliance costs. In our view, rising cost is a trend, not a major de-rating catalyst, and one quarter does not make a bad year. 
  • Cost ratios are higher for DBS and OCBC due to their depressed toplines, on accounting factors. 

All about NPLs and loan loss provisioning ahead 

  • The key concern is the extent that credit costs will run up in 2016. 3Q15 special provisions (SPs) were still benign for the three banks, at 11-20bp of loans. OCBC’s total provisioning rose notably, as it rescheduled payment terms for oil and gas support services companies, which were then flagged as NPLS due to accounting treatment. 
  • Elsewhere, new NPLs are emerging from second-tier developers in Singapore, commodity trading companies and commodity support industries such as transport. 

Our order of preference remains: OCBC, DBS, UOB 

  • We prefer OCBC and DBS to UOB. The rising interest rate hit GEH accounting earnings hard but the risk of rising rates is fading, as well as the GEH earnings hit. OCBC has also taken the bitter provisioning pill in 3Q15. 
  • DBS has quantified its risky exposure from oil and gas but we think there will still be further provisioning. 
  • UOB over-provided for its ASEAN exposure and took writebacks this quarter but ASEAN is clearly weakening.


VALUATION AND RECOMMENDATION 


DBS (Add, TP: S$19.58) 

  • We maintain our Add call on DBS, with a higher GGM-based target price of S$19.58 (1.16x CY16 P/BV) after rollover to CY16. 
  • DBS was the only bank to recognise NIM expansion in 3Q15, thanks to its highest S$ CASA ratio among the three Singapore banks, that allowed it to keep funding costs low as it priced up customer loans with the higher SIBOR. DBS’s asset quality also appeared the most benign, with NPL ratio steady qoq at 0.9%. However, we expect provisions to come in the oil & gas segment, if oil prices continue to remain low. 
  • Looking ahead, the positive for DBS is the bancassurance deal with Manulife, which would lend tailwinds to fee income in 2016.

OCBC (Add, TP: S$10.88) 

  • We maintain our Add call on OCBC, with a higher GGM-based target price of S$10.88 (1.22x CY16 P/BV) as we roll over to CY16. 
  • The biggest feature in OCBC’s 3Q15 results was the spike in NPLs that pushed the NPL ratio up 18bp qoq to 0.88%. However, management explained that the bulk of the increase in NPLs was related to oil & gas support services. 
  • Given the fall in oil prices, OCBC proactively rescheduled these loans to reflect lower charter rates. Once a loan is rescheduled, it has to be classified as a substandard loan and recognised as an NPL, even if the account is still fully paying. Even then, the actual credit cost uptick was better than our expectation, which provided further relief. 
  • We think that OCBC has been the most proactive in recognising provisions, which should lend some shelter in a worsening credit environment.

UOB (Hold, TP: S$20.00) 

  • We upgraded UOB from Reduce to Hold following its 3Q15 results, with a higher target price of S$20.00 (based on GGM, 1.06x CY16 P/BV). 
  • UOB saw three positives this quarter: 
    1. strong trading income with the above-S$100m gain on the sale of investment securities, 
    2. special dividend of 20 Scts in view of its 80th anniversary, and 
    3. muted credit losses, with some SP writebacks. 
  • However, we think that these positives were one-off in nature and unlikely to repeat. Our concerns about UOB are: 
    1. its rising cost pressure due to investments in IT and compliance, 
    2. its biggest exposure among the three banks to a slowing ASEAN, 
    3. its traditionally-highest credit cost among peers, and 
    4. possible funding pressure, given its smallest CASA balance and ratio. 
  • UOB remains our least preferred stock among the Singapore banks.




Kenneth NG CFA CIMB Securities | Jessalynn CHEN CIMB Securities | http://research.itradecimb.com/ 2015-11-02
CIMB Securities SGX Stock Analyst Report ADD Maintain ADD 19.58 Up 18.68
ADD Maintain ADD 10.88 Up 10.20
HOLD Upgrade SELL 20.00 Up 18.23


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