Singapore Banks - Maybank Kim Eng 2016-03-24: Not Without Risks

Singapore Banks - Maybank Kim Eng 2016-03-24: Not Without Risks Singapore Banks DBS GROUP HOLDINGS LTD D05.SI  OVERSEA-CHINESE BANKING CORP O39.SI  UNITED OVERSEAS BANK LTD U11.SI 

Singapore Banks - Not Without Risks 

Chasing After Barclays’ SG/HK Wealth Units? 

  • Barclays’ sale of its Singapore and Hong Kong private-wealth business has reportedly attracted the interest of all three Singapore banks, with DBS said to be leading the race. 
  • Barclays managed USD36b of private-banking assets in Asia Pacific as at end-2014, of which sources said USD20b managed by its SG+HK wealth units, and have a purchase consideration of USD300m. 
  • At price/AUM of 1.5%, we think this is reasonable based on past private banking transactions. 
  • The sale of this business is part of its cost-cutting efforts and operational realignment. 
  • We see an opportunity for Singapore banks to increase their share of the Asian wealth management (WM) industry and bolster earnings. 
  • Still, we remain NEGATIVE on the sector with de-rating catalysts expected from slowing topline growth and rising NPLs. 
  • For sector exposure, recommend UOB (UOB SP, HOLD, TP SGD16.96)

Growing Importance of WM 

  • WM is increasingly important for Singapore banks. As at 2015, DBS’ WM income contributed 13% to its total income and OCBC’s, 27%. DBS and OCBC previously made acquisitions to expand in this space: OCBC acquired ING’s Asia Private Bank in 2009 for USD1.5b (price/AUM of 5.8%) while DBS bought Societe Generale’s Asian private-banking business in 2014 for USD220m (price/AUM of 1.75%). 
  • Tapping growing wealth in Asia is meant to counteract slowing loan growth and revenue headwinds. 

Impact of A Successful Acquisition 

  • If one of the Singapore banks succeeds in bidding, we estimate 1-1.4% accretion for its 2016 net profits. 
  • From our back-of-the-envelope assessment since data is lacking for Barclays’ Asian wealth unit, we estimate that fully-loaded CET1 for the purchasing bank could dwindle by 33-45bps. 
  • With fully-loaded CET1 ratios at 11-12%, the banks could be operating close to their comfort level, leaving little room for growth. 

Remain Negative 

  • We have not changed our view on the sector, still believing that topline growth for Singapore banks will slow while NPLs could potentially arise from the O&G support services segment and China’s onshore exposure. 
  • Private banking transactions are not without risks as governments are now combating tax evasion and money laundering activities. 
  • We remain negative on the sector with UOB as our preferred pick.

Ng Li Hiang Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-03-24
Maybank Kim Eng SGX Stock Analyst Report SELL Maintain SELL 12.68 Same 12.68
SELL Maintain SELL 7.20 Same 7.20
HOLD Maintain HOLD 16.96 Same 16.96