Banks - CIMB Research 2016-08-10: Slippery slope

Banks - CIMB Research 2016-08-10: Slippery slope OCBC OVERSEA-CHINESE BANKING CORP O39.SI  DBS DBS GROUP HOLDINGS LTD D05.SI  UOB UNITED OVERSEAS BANK LTD U11.SI 

Banks - Slippery slope

  • 2Q16 was characterised by NIM compression from falling SIBOR/SOR and faster new NPA formation. We expect these trends to continue to play out into 2H16.
  • Findings from our deep dive into the banks’ upstream oil & gas exposure suggest potential S$1.0bn/S$0.9bn/S$0.6bn of provisions required at DBS/OCBC/UOB.
  • Downgrade from Neutral to Reduce. Negative sentiment from worsening asset quality likely to result in an overhang despite already depressed valuations.
  • UOB replaces DBS as our top pick for its higher provision buffer and smaller NIM downside. OCBC is our least preferred.


NII hurt as NIM fell more than expected; fees were unexciting 

  • 2Q16 saw narrower customer loan spreads with the fall in SIBOR/SOR. 
  • NIM fell 7bp at OCBC and 10bp at UOB, while DBS's improved 2bp qoq on the back of better balance sheet management. 
  • Non-NII improved qoq due to better IB (DBS), wealth management (OCBC, UOB) and trading (UOB), but was hardly exciting. 
  • The banks are guiding for NIMs to come off in 2H but still end up higher than FY15’s level; OCBC expects very low single-digit loan growth while DBS and UOB expect to see mid-single digit growth.


Provisions lower or unchanged despite deteriorating asset quality 

  • Coverage ratios fell to 113%/100%/125% at DBS/OCBC/UOB as lower provisions were recognised despite NPL ratios inching up by 0.1-0.2% pts qoq. This was especially pronounced at OCBC, where provisions were only 12bp of loans (DBS: 52bp, UOB: 32bp); we think it has to catch up in 2H. 
  • New NPA formation accelerated, largely for oil & gas. 
  • While topline continues to be challenged, we think the focus has shifted towards asset quality, particularly the banks’ S$4bn-6bn loans to the upstream oil & gas sector.


Deep dive finds DBS’s exposure to oil & gas most risky 

  • We drilled down on the banks’ exposures to upstream oil & gas on a name-by-name basis, and found DBS’s to be most risky given: 
    1. average debt/PP&E (measure of LTV) of names we screened were at 95%/75%/78% for DBS/OCBC/UOB, 
    2. net debt/EBITDA was at 7.1x/6.1x/6.4x, and 
    3. DBS is the sole banker for Vallianz and Ausgroup, which could default on bonds due 4Q16. 
  • We estimate S$1.0bn/0.9bn/0.6bn of net provisions required if 40% of loans turn into NPLs and assets are force sold at 60% discount to BV.


UOB replaces DBS as top pick 

  • Our new order of preference is UOB, DBS, OCBC. 
  • Given challenges in the oil & gas sector, we think UOB is the best place to seek shelter given its smallest exposure. Its smaller NIM downside and higher provision buffer also give us comfort amid a credit cycle turn. 
  • We think asset quality concerns at DBS have largely been priced in, though negative news flow on oil & gas could limit upside to its share price. 
  • OCBC is our least preferred as we see earnings downside from topline pressure and higher provisions.


Downgrade to Underweight 

  • We downgrade our sector weighting from Neutral to Underweight. While valuations have come off to 0.94x CY16F P/BV for 10% ROE, concerns on asset quality and NIMs are likely to cap upside to share price. 
  • 2Q was a glimpse of what is to come – NIMs started to see pressure from lower rates while asset quality deteriorated amid chunky NPLs. We think these trends will continue to play out and worsen into 2H16.


Highlighted companies 


DBS Group HOLD, TP S$15.31

  • DBS’s exposure to the upstream oil & gas sector, the largest of the three banks, will likely remain an overhang despite positive underlying business trends. We expect 2H to be weaker overall as NIM could dip 3-5bp and higher provisions are expected from oil & gas.

OCBC REDUCE, TP S$8.11

  • OCBC is our least preferred given its slower loan growth, continued NIM pressure from excess liquidity and likelihood of higher provisions to buff up coverage ratios.

United Overseas Bank HOLD, TP S$18.52

  • UOB took a big hit on NIM in 2Q and will likely see less downside than peers from here. Loan growth could be driven by its FIG business and funding of regional infrastructure projects.
  • Its smallest exposure to the upstream oil & gas sector could also lend some comfort.




Jessalynn CHEN CIMB Research | http://research.itradecimb.com/ 2016-08-10
CIMB Securities SGX Stock Analyst Report REDUCE Maintain REDUCE 8.11 Same 8.11
HOLD Maintain HOLD 15.31 Same 15.31
HOLD Maintain HOLD 18.52 Same 18.52


Advertisement



MOST TALKED ABOUT STOCKS / REITS OF THE WEEK



loading.......



ANALYSTS SAY


loading.......