Singapore Banking - UOB Kay Hian 2016-08-10: 2Q16 Roundup ~ Weathering The Offshore Mayhem

Singapore Banking - UOB Kay Hian 2016-08-10: 2Q16 Roundup ~ Weathering The Offshore Mayhem  OCBC OVERSEA-CHINESE BANKING CORP O39.SI  DBS GROUP HOLDINGS LTD D05.SI  UNITED OVERSEAS BANK LTD U11.SI 

Banking – Singapore 2Q16 Roundup: Weathering The Offshore Mayhem 

  • The sector suffered a deterioration in asset quality due to exposure to the O&G sector, which remains under pressure. Hence, we assume continued deterioration over the next four quarters. 
  • Share prices would recover should asset quality stabilise ahead of our time line. 
  • Our top pick is DBS assuming Murphy’s Law would not strike twice, followed by OCBC
  • Maintain OVERWEIGHT.


WHAT’S NEW

  • It was a quarter of hard knocks from a deterioration in asset quality due to exposure to the oil & gas (O&G) sector. 
  • DBS beat our revised earnings forecast after factoring in specific provisions for Swiber, while OCBC’s and UOB’s results were in line with expectations.

Anaemic loan growth but no longer contracting. 

  • DBS and UOB generated positive loan growth of 3.9% qoq and 1.4% qoq respectively. 
  • DBS benefitted from growth in corporate loans and trade loans. 
  • OCBC’s loan growth continued to contract by 1.2% qoq due to a steep 21.9% qoq decline in trade loans.

Resilient NIM at DBS. 

  • DBS’s NIM expanded 2bp qoq to 1.87% due to an improvement in the cost of deposits and CASA ratio. OCBC and UOB experienced steep erosion in NIM of 7bp and 10bp qoq due to the pullback in SIBOR and SOR.

Sequential rebound in fees. 

  • Fees recovered by a strong 9.4% qoq for DBS, 11.5% qoq for OCBC and 9.7% qoq for UOB. We saw strong sequential rebound from wealth management. DBS also benefitted from a strong quarter in investment banking due to the IPOs for ManuLife US REIT and Frasers Logistics & Industrial Trust.
  • All three banks clocked robust contribution from net trading income - S$307m for DBS, S$123m for OCBC and S$216m for UOB. Corporate treasurers would have put in more hedges given volatility in the financial markets precipitated by Brexit.

New NPLs predominantly from O&G. 

  • NPLs have increased across the board (DBS: +21% qoq, OCBC: +12% qoq, UOB: +7.6% qoq). The bulk of the increase came from the O&G sector. DBS recognised exposure of S$721m to Swiber as non-performing assets.
  • OCBC recognised new NPLs of S$196m from Greater China due to a Chinese SOE in the manufacturing sector undergoing restructuring.
  • The oil & gas sector remains under pressure and is susceptible to contract cancellations.
  • Exposure to the offshore support services segment is most vulnerable due to the drop in charter rates. Based on our estimates, OCBC has the largest exposure to offshore support services at 2.8% of total loans, followed by DBS at 2.1% and UOB at 1.4%.
  • Our earnings forecasts have factored in further deterioration in asset quality with NPL ratio peaking at 1.6% for DBS and OCBC in 2Q17.

Well capitalised and well prepared for impending regulatory changes. 

  • All three banks registered sequential improvements in fully-loaded CET-1 CAR. DBS has the highest CET-1 CAR of 13.4%, followed by 12.7% for OCBC.


ACTION


Maintain OVERWEIGHT. 

  • The sudden hit from Swiber would have a negative impact on sentiment. We expect share prices to recover gradually as valuations are cheap at 2016F P/B of 0.89x for DBS (1SD below mean) and 1x for OCBC (2SD below mean). Dividend yields are attractive at 4% for DBS and 4.2% for OCBC.
  • Growth should strengthen in 2H16 due to a pick-up in loan growth. Singapore banks are well capitalised with fully-loaded CET-1 CAR of above 12%. As such, they should be able to weather the strain on asset quality caused by the O&G sector.


SECTOR CATALYSTS


Sluggish economic growth. 

  • Banks are confronted by an extended period of sluggish growth across the region. They have to stay prudent and conservative to weather this period of anaemic growth.

Attractive valuations. 

  • Valuations for banks are undemanding with DBS trading at 2016F P/B of 0.89x (1SD below mean) and OCBC at 1.00x (2SD below mean).


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/ 2016-08-10
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 10.48 Same 10.48
BUY Maintain BUY 19.15 Up 18.90
NOT RATED Maintain NOT RATED 99998 Same 99998


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