OCBC
OVERSEA-CHINESE BANKING CORP
O39.SI
DBS GROUP HOLDINGS LTD
D05.SI
Banking – Singapore Fear Factor Brings Valuations Near GFC Troughs
- If our stressed scenario for exposure to the O&G sector materialises, NPL ratio for DBS would increase by 0.8ppt and OCBC by 0.6ppt.
- We have slashed our 2016 earnings forecasts by 31.4% for DBS and by 23.8% for OCBC, assuming broad deterioration in asset quality.
- Downside is limited as DBS’ 2016F P/B of 0.82x and OCBC’s 0.92x are near GFC troughs. Dividend yields are also attractive at 4.5% and 4.8% respectively.
- Maintain OVERWEIGHT.
WHAT’S NEW
- We performed a stress test and sensitivity analysis for banks’ exposure to the Oil & Gas (O&G) sector as prices for crude oil are expected to stay lower for a longer period of time.
- Among Singapore banks, DBS has the largest exposure to the O&G sector followed by OCBC. UOB has the least exposure to the O&G sector.
• DBS: more vulnerable.
- DBS’ exposure to O&G, encompassing producers, traders, processors and “others” is S$22b as at Sep 15. The segment at risk is the “others” category, which includes offshore marine transportation, oilfield services and shipyards. According to management, the loan-to-value (LTV) ratio for loans extended to these companies is healthy at 60-65%.
- Management had previously stress tested its exposure to the O&G sector assuming prices of crude oil stay at WTI US$35/Brent US$40 per bbl for two years. About 5% of these accounts are deemed to be vulnerable and credit costs are expected to be less than S$100m in this scenario.
• OCBC: Trimmed exposure to O&G in advance.
- OCBC’s NPLs has increased 27.5% or S$402m qoq in 3Q15 due to exposure to O&G support services relating to charter for rigs and offshore support vessels. These loans were booked in Singapore but credit risk resides in Malaysia and Indonesia as well.
- The loans were rescheduled, and being restructured loans they were classified as NPLs. The bulk of the increase (estimated at about 80%) is made up of loans that are not overdue.
- OCBC had already reduced its exposure to O&G from 7% to 6% of total loans in 3Q15.
• UOB: Least exposure to O&G.
- UOB’s exposure to the O&G sector is less than 5% of total loans, the lowest among the three local banks.
- Its exposure to the O&G sector is skewed towards traders, wholesalers and downstream players. The mix between upstream and downstream is roughly 40:60.
ACTION
• Stress Test.
- We make similar assumptions for all three Singapore banks that:
- 50% of the exposure to the O&G sector is offshore marine transportation, oilfield services and shipyards, which are susceptible to depressed prices of crude oil.
- The balance of 50% for exposure to producers, traders and processors are assumed to be more resilient and less affected by fluctuation in prices of crude oil.
- Probability of default of 20% for exposure to offshore marine transportation, oilfield services and shipyards (equivalent to 10% of exposure to the O&G sector). This is an extreme situation whereby loans extended to one in five companies become nonperforming.
- Loss given default of 50%. We assume that the defaulting borrowers could dispose assets pledged as collaterals to partially repay the banks. Thus, banks need to make specific provisions equivalent to 50% of the non-performing loans.
- In the event that our stressed scenario materialises, NPL ratio for DBS would increase by 0.8ppt, OCBC by 0.6ppt and UOB by 0.5ppt. DBS’ 2016 forecasted earnings would be reduced by 20.2%, OCBC’s by 13.7% and UOB’s by 11.8%. 2016F ROE would be reduced to 8.9% for DBS, 9.6% for OCBC and 9.0% for UOB.
DBS Group Holdings (BUY/S$13.27/Target: S$17.80).
- We have slashed our earnings forecast for DBS by 31.4% for 2016 and by 30.1% for 2017. We expect NPL ratio to peak at 2.8% in mid-17 compared with 1.0% at end-15. We have factored in higher credit costs of 73bp for 2016 (previous: 26bp) and 66bp for 2017 (previous: 23bp).
- Our target price of S$17.80 is based on 1.1x P/B, which is derived from the Gordon Growth Model (ROE: 8.6% (average of 2016F, 2017F and 2018F), COE: 7.8% and Growth: 0.0%).
Oversea-Chinese Banking Corp (BUY/S$7.49/Target: S$9.80).
- We have slashed our earnings forecast for OCBC by 23.8% for 2016 and by 22.2% for 2017. We expect NPL ratio to peak at 2.6% in mid-17 compared with 1.0% at end-15. We have factored in higher credit costs of 68bp for 2016 (previous: 22bp) and 59bp for 2017 (previous: 19bp).
- Our target price of S$9.80 is based on 1.21x P/B, which is derived from the Gordon Growth Model (ROE: 9.4% (average of 2016F, 2017F and 2018F), COE: 7.8% and Growth: 0.0%).
United Overseas Bank (NOT RATED/S$17.50).
- UOB has the least exposure to the O&G sector. It is well positioned to weather the current credit cycle.
SECTOR CATALYSTS
- Economic growth has slowed in both Southeast Asia and China.
- Nevertheless, banks’ share prices have experienced massive correction and valuations are near trough levels of the global financial crisis (GFC). DBS is trading at 2016F P/B of 0.82x (GFC: 0.67x) and OCBC at 0.92x (GFC: 0.83x). Thus, downside is limited.
ASSUMPTION CHANGES
- Key changes to our earnings are as stated above.
RISKS
- Further economic slowdown and political risks in regional countries.
Jonathan Koh CFA
UOB Kay Hian
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http://research.uobkayhian.com/
2016-02-04
UOB Kay Hian
SGX Stock
Analyst Report
9.80
Down
11.25
17.80
Down
22.34
P/s: Gordon Growth Model: A model for determining the intrinsic value of a stock, based on a future series of dividends that grow at a constant rate. Given a dividend per share that is payable in one year, and the assumption that the dividend grows at a constant rate in perpetuity, the model solves for the present value of the infinite series of future dividends.
