Banks - RHB Invest 2016-03-07: Asset Quality Trends To Track In 2016

Banks - RHB Invest 2016-03-07: Asset Quality Trends To Track In 2016  Singapore Banks DBS GROUP HOLDINGS LTD D05.SI  OCBC OVERSEA-CHINESE BANKING CORP O39.SI  UOB UNITED OVERSEAS BANK LTD U11.SI 

Banks - Asset Quality Trends To Track In 2016 

  • The recent rebound in oil prices are providing some reprieve for SG Banks, given the vulnerability of their O&G exposures to an extended period of low oil prices. 
  • Our tracking of asset quality trends point to further rise in NPLs and credit costs in 2016 but we do not expect credit costs of > 200bps nor do we see any need for fresh equity. 
  • Current sector valuations at -1SD historical mean suggests that the market is pricing in a spike in credit cost that would lower ROEs to c.9% vs 11-11.5% in 2015. 
  • OCBC is our Top Sector Pick. 

Improved sentiment providing some reprieve. 

  • Share prices of Singapore’s three listed banks (SG Banks) have rebounded off the lows seen in mid-February as investors took some comfort from: 
    1. details provided on exposures to the oil & gas sector and China, two keys areas of asset quality concerns and banks’ confidence non-performing loan (NPL) ratios would peak below the Global Financial crisis (GFC) levels, and 
    2. the recent recovery in oil prices, which would somewhat ease pressure on asset quality. 

Key trends to watch. 

  • We believe share prices of SG Banks would remain volatile in 2016. Banks have guided for benign credit costs but investors are not fully convinced. Any negative turn in macroeconomic data points would easily trigger a “risk-off” stance. 
  • Our tracking of 4Q15 asset quality trends suggests: 
    1. Asset quality stress rising. The doubling in new NPL formation to 14-15bps of loans in 2H15, falling portion of not overdue NPLs and the rise in past due but not impaired loans indicate that the deterioration in asset quality has gathered pace. We expect new NPL formation to trend higher before plateauing in 3Q16. 
    2. Write-offs kept NPL ratio benign. Absolute new NPL formation surged 179% YoY to SGD2,962m in 2015 but gross NPLs rose by up a smaller 23% YoY. This was mainly due to NPL write-offs that contained the rise in NPL ratio at a low 1.06% vs 0.88% in Dec 2014 and 2.37% in 2009. 
    3. Loan provisioning did not keep pace. Although quarterly credit cost was consistently higher than the new NPL formation, SG Banks’ average loan loss coverage (LLC) ratio declined to 130.8% in Dec 2015 (Dec 2014: 152.5%). This suggests that a substantial portion of provision charges was for NPLs written off. 
    4. Credit cost to stay above trend. Given our expectations that the new NPL formation would trend higher before plateauing in 3Q16, we believe SG Banks’ credit cost would stay elevated in 2016 to prevent a further fall in LLC ratio. 

OCBC is our Top Pick. 

  • We expect sector core earnings to dip 2% in 2016F with a 2% YoY growth in PIOP offset by higher credit cost (33bps vs 24bps in 2015). 
  • Gross NPL is projected to edge higher to 1.29%. At current prices, SG Banks are trading at consensus 2016F P/BV of 0.9x and P/E of 9x, which are at -1SD historical mean. 
  • OCBC, which has the lowest NPL ratio among SG Banks, has been proactive in its review and control of asset quality. The bank’s 120bps improvement in its common equity tier 1 (CET1) ratio has closed the gap with peers and removed concerns of a potential need for fresh equity. 

Key risks to our view are: 

  1. sharper-than-expected deterioration in asset quality coming from either weaker-than-expected oil prices ie if prices stay at < USD30/barrel (bbl) for a prolonged period and/or sharper-than-expected slowdown in the Chinese economy, 
  2. sharper-than-expected depreciation in CNY, and 
  3. weaker-than-expected net interest margins (NIMs).

Singapore Research RHB Invest | http://www.rhbinvest.com.sg/ 2016-03-07

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