Banks - CIMB Research 2016-01-04: Moderating to a new norm

Banks - CIMB Research 2016-01-04: Moderating to a new norm OCBC OVERSEA-CHINESE BANKING CORP O39.SI  DBS DBS GROUP HOLDINGS LTD D05.SI  UOB UNITED OVERSEAS BANK LTD U11.SI 

Banks - Moderating to a new norm 

  • YTD system loan growth came in at 1.4% in Nov 2015 (Nov 2014: 9.1%). 
  • Loan growth was dragged by business loans (ex-property), which fell 2.3% YTD. 
  • System deposits grew by a faster 2.0% YTD, with growth mainly in fixed deposits (+6.1%) and savings deposits (+1.3%). This coincided with higher deposit rates. 
  • We expect domestic loan growth in the low-single-digit range in 2015-16, while a higher interest rate environment should lend tailwinds to NIMs. 
  • Maintain Overweight. Our most to least preferred stocks are OCBC, DBS, UOB. 


■ Moderating loan growth 

  • Total system loan growth for the year to date (YTD) Nov 2015 came in at 1.4% (Nov 2014: 9.1%). 
  • Overall loan growth was dragged by the contraction in business loans, compensated by growth in property loans. YTD Nov 2015, business loans fell 2.3%, consumer loans rose 2.4%, while property loans increased 9.7%. 
  • We expect loan growth in the low-single-digit range in 2015-16 due to weak loan demand. 

■ Growth in property loans dampened by business loans 

  • Business loans saw YTD contraction in other loans (-8.0%), commerce (-5.1%), manufacturing (-2.3%); growth came from agriculture (+6.5%) and business services (+5.0%). 
  • Consumer loans were dragged by car loans (-9.1%) and credit cards (-2.5%); growth came from loans to individuals (+4.0%). 
  • Property loans, comprising building & construction (+18.6%) and mortgages (+3.5%), propped up overall loan growth. 

■ Deposits rose at a faster pace, with higher deposit rates YTD 

  • Nov 2015, deposits rose 2.0%, exceeding the pace of loan growth. Deposit collection was mainly in fixed deposits (+6.1%) and savings deposits (+1.3%); demand deposits contracted (-2.9%). Fixed deposits surged in Sep, coinciding with a 1bp hike in average 3-month and 12-month fixed deposit rates to 0.18% and 0.34%, respectively. 

■ Higher interest rate environment to lend tailwinds 

  • Although loan growth is moderating to a new norm, we think the positives of a higher interest rate environment on NIM will compensate for lower loan demand. 1H15 saw the impact of a higher SIBOR and SOR benefiting the banks’ margins on floating rate loans. 
  • Based on our channel checks, new fixed rate mortgages were disbursed at a higher interest rate in Dec 2015, which will provide NIMs with another leg up in 4Q15 onwards. 

■ Credit quality of mortgage book remains benign 

  • The banks’ consumer loan books remain sound. Mortgages, which make up 20%/26%/27% of DBS/OCBC/UOB’s loan books and 16% of system loans, continue to see benign credit quality. 
  • As of 3Q15, system mortgage NPL was at 0.4% (DBS: 0.2%, OCBC: 0.5%, UOB: 1.0%). 
  • We are more concerned with the banks’ exposure to commodities, especially second-tier oil & gas services firms, and a slowing ASEAN. 

■ Maintain Overweight 

  • For DBS and OCBC- even with our bearish assumptions for FY16 (3-5% below consensus)- we think that ROEs still justify COE, which makes them good value at the current 1x CY16 P/BV. 
  • OCBC remains our most preferred stock for potential synergies from its WHB acquisition and opportunities to monetise non-core assets.


Highlighted Companies 


DBS Group ADD, TP S$19.58, S$16.69 close 

  • Amid a slow environment, DBS has the added engine of its Manulife bancassurance deal, which will add to fee income starting in 2016. 
  • Our key concern is its biggest exposure to oil & gas at 8% of loans in 3Q15 (OCBC: 6%, UOB: 5%). 

OCBC ADD, TP S$10.88, S$8.80 close 

  • OCBC remains our top pick. It has the best balance of exposure to ASEAN and China, which allows it to reap benefits from both the AEC and the One Belt, One Road policy. 
  • We also see potential upside from synergies from its WHB acquisition and divestment of noncore assets. 

United Overseas Bank HOLD, TP S$20.00, S$19.61 close 

  • UOB is most susceptible to an uptick in credit costs, given its large SME customer base. 
  • UOB also lags behind its peers in terms of access to cheap funding, which makes it the likely smallest beneficiary of a rising rate environment.



Kenneth NG CFA CIMB Securities | Jessalynn CHEN CIMB Securities | http://research.itradecimb.com/ 2016-01-04
CIMB Securities SGX Stock Analyst Report ADD Maintain ADD 10.88 Same 10.88
ADD Maintain ADD 19.58 Same 19.58
HOLD Maintain HOLD 20.00 Same 20.00


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