Banks - CIMB Research 2016-05-03: Limited upside from here


Banks - Limited upside from here

  • Uninspiring 1Q16 results season – banks saw limited loan growth and NIM upside, and capital markets fees faltered. Only DBS saw relatively resilient non-NII.
  • Asset quality deteriorated, and NPL ratios inched up to 1.0-1.4%.
  • The banks have performed well YTD with the recovery in oil price, and we view this as an opportunity to trim positions. DBS is now our top pick on relative valuations.
  • We downgrade our sector weighting from Overweight to Neutral, as valuations have recovered to 1x P/BV, which we think is just for forecasted ROEs of 10% in CY16.

DBS above, UOB in line, OCBC disappointed

  • DBS’s 1Q16 core net profit beat expectations on higher bancassurance and trading, UOB’s was in line, but OCBC disappointed due to slower topline growth and MTM losses on GEH’s non-par fund. 
  • Loan growth was weak at -3.2%/-1.5%/+1.0% qoq at DBS/OCBC/UOB, with the effect more pronounced at the former two due to S$ strength against US$/HK$, coupled with evaporation of trade loans. 
  • NIM was flattish at +/-1bp.

Non-NII the key differentiator, cost-income ratios rose

  • Non-NII was the main differentiator this quarter, with DBS (+25% qoq) outperforming on better-than-expected maiden contributions from its Manulife bancassurance deal, resilient trade and loan-related fees and a decent trading quarter. 
  • OCBC (-22% qoq) and UOB (-14% qoq) felt the brunt of weak capital markets on both fees and trading. 
  • As topline slowed while expenses stayed high on technology and other investments, cost- income ratios crept up to 44-45% across the banks.

Cracks in asset quality starting to show

  • NPL ratios inched up to 1.0%/1.0%/1.4% at DBS/OCBC/ UOB. 
  • DBS recognised new NPAs for a steel manufacturer in India and spillover of Hong Kong corporates’ defaults on RMB hedging activities from 4Q15. 
  • OCBC continued to recognise NPLs for oil & gas as customers requested to restructure loan repayment terms. 
  • One of UOB’s clients with commodities exposure in Canada and Australia saw cash flow problems. 
  • These point to a broadening out of asset quality issues as the economy slows, though not alarming.

DBS replaces OCBC as our new top pick

  • As we enter a slowing environment, our investment strategy for the banks is to look for short-term trading opportunities as valuations oscillate within the 0.9x-1.1x P/BV band. In this regard, DBS stands out as the most attractive now. 
  • While DBS has the largest exposure to the problem sectors of oil & gas and China, we think NPLs could take a while to peak (likely in FY17-18) and OCBC and UOB will not be spared either. 
  • DBS now replaces OCBC as our sector top pick.

Downgrade sector weighting from Overweight to Neutral

  • The banks have gained 15% since the trough in Feb, outperforming the STI (+12%), as the recovery in oil price eased concerns on exposure to the commodities sector. 
  • As valuations have recovered to 1.0x P/BV for forecasted ROEs of 10%, we think this is a good time to trim exposure, especially in view of earnings headwinds from a slowing topline and rising costs. 
  • We downgrade our sector weighting from Overweight to Neutral.

Valuation and recommendation

DBS (Add, TP: S$17.96)

  • We maintain an Add call on DBS, with a GGM-based target price of S$17.96 (1.05x CY16F P/BV). DBS replaces OCBC as our top pick, and is our only Add call in the sector. 
  • 1Q16 showed that DBS has a relatively resilient franchise compared to its peers: 
    1. while loans contracted 3% qoq, net interest income shrank by a smaller 1% qoq as it recognised some NIM expansion; 
    2. fee income outperformed by a wide margin, partly helped by its push into digital banking, and also due to its 15-year bancassurance deal with Manulife; 
    3. trading had a decent quarter amid a volatile market; and 
    4. asset quality remained relatively benign. 
  • We view DBS’s valuation of 0.9x P/BV as attractive for its superior ROE.

OCBC (Hold, TP: S$8.80)

  • We downgraded OCBC from Add to Hold following a weak set of 1Q16 results, as core banking operations showed signs of deceleration. 
  • Loan growth was zero even in constant currency terms (actual: -1.5% qoq), while customer loan spreads felt a 1bp pinch. This led to NII falling 3% qoq. 
  • Fees disappointed on most fronts, not just capital-markets related ones, with total fee income falling 7% qoq. 
  • Mark-to-market losses at GEH’s non-par fund added on to a weak set of results. 
  • The positive is that OCBC seems most proactive in recognising the NPLs of the oil & gas support services sector, and even then loan allowances were still manageable at 30bp of loans, up just 2bp qoq. 
  • Our GGM-based target price of S$8.80 is based on 1.02x CY16F P/BV.

UOB (Hold, TP: S$18.74)

  • We maintain a Hold rating on UOB, with a GGM-based target price of S$18.74 (0.98x CY16F P/BV)
  • UOB was the only bank to recognise positive loan growth in 1Q16, but this was doused by a 1bp contraction in NIM. It was also the only bank to keep NPL ratios constant at 1.4%. However, these positives did not translate into bottomline and ROE outperformance as its fee engine stalled, with loan-related and wealth management fees drying up. 
  • At 1.0x P/BV, we think UOB is fairly valued.

Kenneth NG CFA CIMB Securities | Jessalynn CHEN CIMB Securities | http://research.itradecimb.com/ 2016-05-03
CIMB Securities SGX Stock Analyst Report HOLD Downgrade ADD 8.80 Down 10.01
ADD Maintain ADD 17.96 Down 18.26
HOLD Maintain HOLD 18.74 Same 18.74