OCBC
OVERSEA-CHINESE BANKING CORP
O39.SI
DBS GROUP HOLDINGS LTD
D05.SI
Banking – Singapore 1Q16 Roundup: Pull-back From Trade Loans; Well Capitalised
- Banks reported single-digit growth in net interest income despite a contraction in trade loans.
- Fees were generally lower yoy with drag from market-sensitive sources. The exception was DBS, which benefitted from its bancassurance partnership with ManuLife.
- The deterioration in asset quality was mild while fully-loaded CET-1 CAR improved 0.4-0.8ppt qoq to above 12%.
- Valuations are undemanding with DBS at 2016F P/B of 0.90x and OCBC at 1.00x.
- Our top pick is DBS, followed by OCBC.
- Maintain OVERWEIGHT.
WHAT’S NEW
- DBS’ results exceeded expectations while OCBC’s and UOB’s results were in line with expectations.
• Forex affected loan growth.
- DBS and OCBC, which have been more active in providing trade loans to Chinese customers, suffered contraction in loans of 3.2% and 1.2% qoq.
- In particular, DBS was more affected as US$ and HK$, which accounted for 30.2% and 11.8% of total loans respectively, weakened by 4.7% against the S$.
- UOB eked positive loan growth of 1% qoq as the ringgit, which accounted for 11.2% of total loans, strengthened 4.9% against the S$.
• Earnings dominated by net interest income.
- NIMs were mostly stable and relatively unchanged compared with 4Q15.
- Net interest income grew 8.5% at DBS, 4.6% at OCBC and 6.2% at UOB, predominantly driven by expansions in NIM of 16bp, 13bp and 2bp respectively on a yoy basis.
• Weakness from non-interest income.
- Fee income was affected by weaker contribution from market-sensitive sources. In particular, OCBC’s and UOB’s fees from wealth management declined 15.5% yoy and 26.1% yoy respectively. The decline was most severe at UOB at -26.1% yoy. DBS was the exception with wealth management fees growing 5.4% yoy, boosted by its bancassurance partnership with ManuLife.
- OCBC experienced a 48.5% yoy falloff in contribution from insurance. Great Eastern was badly affected by higher claims in its non-participating funds, widening of credit spreads and correction in the equity market.
- Net trading income was resilient at S$315m for DBS, S$122m for OCBC and S$165m for UOB due to higher treasury customer flows.
• Well capitalised and prepared for impending regulatory changes.
- All three banks registered improvements in fully-loaded CET-1 CAR, which are comfortably above 12%.
- DBS guided that risk-weighted assets would increase by 10% while OCBC guided that CET-1 CAR would fall by 1ppt if Basel 3.5 were implemented.
• Mild deterioration in asset quality.
- NPLs increased by 3.1% qoq for DBS and 9.4% qoq for OCBC but declined by 1.4% qoq for UOB. NPL ratios for both DBS and OCBC edged up by 0.1ppt to 1.0% while UOB’s NPL ratio was unchanged at 1.4%.
- DBS has reduced exposure to the Offshore Support Services segment by S$600m-700m to S$6.4b. Conversely, UOB has increased exposure to traders/downstream industries by S$1.2b qoq to S$5.1b. We estimate that OCBC’s NPLs for the O&G sector have increased from S$822m to S$895m, up 8.9% qoq.
ACTION
• Maintain OVERWEIGHT.
- DBS’ results exceeded expectations while OCBC’s and UOB’s results were in line with expectations. Investors should be relieved that the deterioration in asset quality was mild.
- Growth could be strengthened in 2H16 due to a pick-up in loan growth.
- Singapore banks are well capitalised with fully-loaded CET-1 CAR above 12%.
SECTOR CATALYSTS
• Growth in Asia.
- Banks’ corporate banking business will benefit from growth in intraregional trade and investments.
- Consumer banking business will benefit from rising affluence in Asia.
• Attractive valuation.
- Valuations for banks are undemanding with DBS trading at 2016F P/B of 0.90x and OCBC at 1.00x.
ASSUMPTION CHANGES
- As per results notes for DBS and OCBC.
RISKS
- Further economic slowdown and political risks in regional countries.
PEER COMPARISON
Jonathan Koh CFA
UOB Kay Hian
|
http://research.uobkayhian.com/
2016-05-04
UOB Kay Hian
SGX Stock
Analyst Report
10.98
Up
10.68
19.22
Down
19.25
