Banks - OCBC Investment 2016-10-07: Challenges ahead; valuations are decent

Banks - OCBC Investment 2016-10-07: Challenges ahead; valuations are decent DBS GROUP HOLDINGS LTD D05.SI

Banks - Challenges ahead; valuations are decent

  • Challenging environment.
  • Loans growth projected at 1.5%.
  • Share price has captured most of the negatives.

Economy is slowing; rates remain low 

  • Recently, Singapore’s Deputy Prime Minister shared about the Singapore economy entering a tough period that will likely last for a while, with growth potentially hitting below the 2% mark. In addition, the SGD slipped lower recently versus the USD (from 1.3313 about a quarter ago) and local interest rates remained low. 
  • Meanwhile, the 3-month SGD Swap Offer Rate (SOR) [SORF3M] has also come off from this year’s high of 1.76235% (in Jan 2016) to a recent level of 0.5806%. 
  • Similarly, the 3-month SIBOR rate [SIBF3m] has also eased off from this year’s high of 1.2540% (in Jan 2016) to a recent level of 0.8724%.

Loans remained lacklustre; low single-digit growth 

  • Not surprisingly, lending was fairly lacklustre this year. Based on the latest number, lending in August grew 1.1% MoM (-1.6% YoY) in August. Business loans rose 1.6% MoM to S$357b, while consumer loans rose 0.4% MoM to S$247b. 
  • According to OCBC Global Treasury Research and Strategy, full year loans growth is expected to be 1.5% and full year GDP growth will be at 1.9%.

Challenges from several core sectors 

  • Hit largely by a spate of negative news from the local oil & gas sector, there was a spike in impairment charges in 2Q16 as well as higher NPL ratio. 
  • Apart from oil & gas, banks’ exposures to the commodity and property sectors also came under scrutiny together with exposures to Chinese and European loans. In line with this, share prices also took a hit and corrected to capture the weakened sentiment and market outlook. 
  • DBS is down 7.7% YTD, while UOB is down 3.9% and OCBC is down 1.1%.

DBS remains a BUY 

  • While DBS has taken the biggest hit in terms of decline in share price, we believe that most of the negatives have already been priced into the stock as the share corrected from the 52-week high of S$18.25 to the current level. 
  • We have been advocating accumulation at S$15.00 or lower since two months ago. In addition, the impairments and NPLs are still below the levels seen during the Global Financial Crisis. 
  • We are reiterating our BUY on DBS and our fair value estimate remains at S$16.68 with current estimated dividend yield at 3.9%.

Carey Wong OCBC Investment | 2016-10-07
OCBC Investment SGX Stock Analyst Report BUY Maintain BUY 16.68 Same 16.680