Banks - RHB Invest 2015-12-02: Strong Balance Sheet Over Topline Growth

Banks - RHB Invest 2015-12-02: Strong Balance Sheet Over Topline Growth Singapore Banks DBS GROUP HOLDINGS LTD D05.SI  OVERSEA-CHINESE BANKING CORP O39.SI  UNITED OVERSEAS BANK LTD U11.SI 

Banks - Strong Balance Sheet Over Topline Growth 

  • Healthy balance sheet rather than topline growth, in our view, would be key investment criteria against a still-challenging 2016. 
  • Maintain OVERWEIGHT on SG Banks’ defensive qualities, ie resilient asset quality and solid fully-loaded Common Equity Tier 1 ratios of 11-12%. 
  • DBS is our Top Pick on the smallest exposure to ASEAN amongst peers and offers best leverage to US rate normalisation, though NIM expansion is likely to be more moderate than earlier expected. 

 Underlying operations sound. 

  • Singapore’s three listed banks (SG Banks) are facing the challenge of moderating topline growth. 
  • Aggregate operating income is projected to slow to 5% in 2016 after moderating to 8% in 2015 (2014: +12% YoY). 
  • Still, we believe sector core net profit can grow 7% in 2016 (2015: +7.5%) on well-controlled opex and manageable credit costs. 

 Loan demand soft but net interest margins (NIMs) stable. 

  • We forecast for moderate loan growth (constant currency terms) of 4.5% in 2016 vs 3.4% in 2015 and 14% in 2014. 
  • Domestic loan demand is soft, reflecting Singapore’s low GDP growth, while the regional lending business is being dampened by China’s slowdown and its knock-on effect on ASEAN economies. 
  • Supporting net interest income would be stable NIMs. Although we see NIM pressures from China and ASEAN, this would be cushioned by a measured rise in Singapore’s short-term rates, along with the slow and gradual normalisation of US rates from December. 

 Non-interest income volatile. 

  • We do not expect a repeat of the hefty trading gains seen in 9M15 in 2016. Fee income is also expected to be tempered by lower income from loan-related activities and investment banking fees. 

 Asset quality to hold up. 

  • SG Banks’ asset quality is the best among ASEAN peers, as evident by the benign non-performing loans (NPLs) for 9M15. 
  • Exposure to the commodities sector, China and domestic mortgages would remain areas of concern in 2016. However, with proactive actions to assist distressed borrowers, we do not expect massive blowups in NPLs. 
  • SG Banks are confident provisions would not be significantly higher and we have factored in credit cost of 22bps for 2016 (2015: 23bps), with loan loss coverage stable at 145%. 

 DBS our Top Pick. 

  • SG Banks are down 14.9% YTD (9 Nov 2015) vs the STI’s 10.6% fall, lowering valuation multiples to near -1SD historical mean with consensus 12-month forward P/E at 9.9x and P/BV of 1.05x. 
  • Against ASEAN peers, SG Banks stand out for their asset quality resilience and well-capitalised balance sheets. 
  • DBS is our Top Pick, as it has the smallest exposure to ASEAN among peers and offers the best leverage to the US rate cycle. 
  • Overseas Chinese Banking Corp (OCBC) remains a BUY as proactive restructuring of commodities-related loans would keep credit cost in check. 
  • Maintain NEUTRAL on United Overseas Bank (UOB) given its higher exposures to ASEAN and the domestic property market.

Singapore Research RHB Invest | http://www.rhbinvest.com.sg/ 2015-12-02
RHB Invest SGX Stock Analyst Report BUY Maintain BUY 21.10 Same 21.10
BUY Maintain BUY 10.70 Same 10.70
NEUTRAL Maintain NEUTRAL 21.70 Same 21.70