Singapore Banking - UOB Kay Hian 2016-02-23: 4Q15 Round-up: Mean Reversion With OCBC Outperforming

Singapore Banking - UOB Kay Hian 2016-02-23: 4Q15 Round-up: Mean Reversion With OCBC Outperforming OCBC OVERSEA-CHINESE BANKING CORP O39.SI  DBS GROUP HOLDINGS LTD D05.SI 

Banking – Singapore 4Q15 Round-up: Mean Reversion With OCBC Outperforming 

  • NIM expanded by 2-8bp qoq while asset quality remained resilient. 
  • Further disclosure on exposure to the O&G sector indicates that loans extended to the riskier offshore support services are well collaterised. 
  • OCBC has been the most proactive in rescheduling loans to the O&G sector since 3Q15 and was realistic in recognising them as NPLs. 
  • Top pick is OCBC, followed by DBS. Maintain OVERWEIGHT. 


WHAT’S NEW 

  • OCBC’s 4Q15 results were above expectations. DBS’ results were slightly above but UOB’s results were in line. 

 NIM expanded for all three banks. 

  • Loan growth was anaemic at 2.8% yoy for DBS, 0.4% yoy for OCBC and 4% yoy for UOB. 
  • Net interest margin (NIM) expanded by 6bp, 8bp and 2bp qoq for DBS, OCBC and UOB to 1.84%, 1.74% and 1.79% respectively. 

 Healthy growth in fees. 

  • Fee income was affected by weaker contribution from market sensitive sources. Nevertheless, DBS, OCBC and UOB managed to achieve single-digit increases of 5.7% yoy, 5% yoy and 6.7% yoy respectively. 
  • Net trading income was resilient at S$289m for DBS, S$163m for OCBC and S$211m for UOB due to higher treasury customer flows. 

 Asset quality remained resilient. 

  • NPL ratios for both DBS and OCBC were unchanged at 0.9%. UOB’s NPL ratio deteriorated by 0.1ppt to 1.4%. 
  • OCBC was more conservative to recognise NPLs from the Oil & Gas sector since 3Q15. 

 New order in capital adequacy. 

  • The revised MAS Notice 637 Risk-Based Capital Adequacy Requirements took effect from 1 Jan 15. 
  • DBS has the highest fully loaded CET-1 CAR of 12.4%, followed by OCBC’s at 11.8%. MAS has clarified the treatment of undrawn commitments. 
  • Following the clarification, UOB’s fully loaded CET-1 CAR had deteriorated by 0.5ppt qoq to 11.7%. 


ACTION 


 Maintain OVERWEIGHT. 

  • Investors are currently overly pessimistic. We believe current share prices for banks have already imputed a crisis of severity similar to the Global Financial Crisis. 
  • We maintain our BUY calls as downside could be limited. 


SECTOR CATALYSTS 


 Growth in Asia. 

  • Banks’ corporate banking business will benefit from growth in intraregional trade and investments. The consumer banking business will benefit from rising affluence in Asia. 

 Attractive valuation. 

  • Valuations for banks are undemanding with DBS trading at 2015F P/B of 0.83x and OCBC at 0.95x. 


ASSUMPTION CHANGES 

  • As per results notes for DBS and OCBC. 


RISKS 

  • Further economic slowdown and political risks in regional countries.



Jonathan Koh CFA UOB Kay Hian | http://research.uobkayhian.com/ 2016-02-23
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 9.98 Same 9.98
BUY Maintain BUY 17.48 Same 17.48


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