Banks - RHB Invest 2016-11-09: Provisions On The Radar, But Stay Alert To Wider NIMs

Banks - RHB Invest 2016-11-09: Provisions On The Radar, But Stay Alert To Wider NIMs Singapore Banks DBS GROUP HOLDINGS LTD D05.SI  OCBC OVERSEA-CHINESE BANKING CORP O39.SI  UOB UNITED OVERSEAS BANK LTD U11.SI 

Banks - Provisions On The Radar, But Stay Alert To Wider NIMs

  • 3Q16 results revealed elevated NPL ratios and generally higher credit costs. 
  • We believe NPL ratios are likely to keep rising, albeit at a slow pace. Provisions should also continue to increase. However, NIM expansion is the alert we believe could trigger earnings momentum for the banks. The impending FFR hike should lead to a firmer SIBOR. 
  • Our sensitivity shows that DBS’ net profit would rise the most for every bps rise in SIBOR – this supports our BUY recommendation for this counter.

Asset Quality Deterioration To Persist 

Oil & gas asset quality deteriorating. 

  • In the recent results release window, it was evident that asset quality has continued to deteriorate. All SG Banks recorded mild increases in NPL ratios, largely attributed to the oil & gas sector. The NPL ratio for exposure to this segment was as high as +8% for OCBC.

Some non-oil & gas SMEs were slow in payments. 

  • Non-oil & gas sectors continued to see relatively good asset quality, although banks’ managements have cautioned that some SMEs have been slow with their payments. This can be a prelude to worsening SME asset quality in the quarters ahead. This is especially so if the economic environment remains weak for a prolonged period.

We forecast continued rising NPL ratios. 

  • For the oil & gas space, banks’ managements have guided for continuing rises in NPL ratios. We have assumed a gradually rising NPL ratio for SG Banks through 2017.

Current situation different from past slowdowns. 

  • The current situation is different from what the banks experienced in previous economic slowdown periods: 
    1. During the 1998 AFC, SG Banks recorded NPL ratios of as high as 12% at the peak. That period was marked by a sharp rise in interest rates and plunging regional currencies, which aggravated the asset quality deterioration; 
    2. During the 2008 GFC, the NPL ratio of the SG Banks rose to as high as 2.4%. The adverse impact on the banks was quite short-lived. as central banks kept interest rates low through that period. 
  • Though we have assumed some small increases in Singapore interest rates through 2017, the rate of rise should not impact NPL ratios significantly.

We have factored in generally higher credit costs going into 2017. 

  • Besides rising NPL ratios, collateral values of oil & gas loans have fallen sharply. Thus, banks have raised provisions in 3Q16 to factor this in. There is a high risk of further falls in collateral values, therefore, we see the risk of increased credit cost going into 2017.

For UOB, its higher GP to loan ratio provides a cushion

  • For UOB, its higher GP to loan ratio provides a cushion, and could help the bank keep its SP credit costs lower. For example, in 3Q16, UOB released some its GP to offset the sharp rise in SP, and this kept overall provisions relatively stable both QoQ and YoY.
  • Hypothetically, if UOB were to release its GP to a level where the GP to loan ratio was closer to the other two banks, ie 1.1%, then the bank can release c.SGD650m. This is 18% of UOB’s FY17F PBT.

UOB also has the highest LLC vs peers. 

  • At 111%, it is higher than the around 100% for UOB’s other two peers. This provides scope for the bank to make less provisions than OCBC and DBS going forward.

Expect NIMs Expansion In Future Quarters 

3Q16 NIMs were generally narrower QoQ. 

  • Soft Singapore interest rates contributed to the margins squeeze. Expectations are for a continued soft SIBOR and Singapore Swap Offer Rate (SOR) in 4Q16.
  • However, with the impending FFR hike, we believe domestic interest rates would be on an uptrend, and this ought to help widen banks’ FY17 NIMs.

DBS’s NIMs expected to widen the most between 2015-2017. 

  • We have factored in a widening of NIMs (from FY15-17) of 5bps for DBS, 4bps for OCBC and 1bp for UOB. 
  • DBS is a key beneficiary of rising Singapore interest rates as its SGD current account, savings account (CASA) to total deposit is a high 88%.

DBS earnings most sensitive to a SIBOR rise. 

  • For every 10bps rise in SIBOR, our sensitivity analysis shows that DBS’ net profit would rise 1.7%. 
  • By comparison, OCBC and UOB’s would rise by 0.8% and 1.2% respectively.

DBS is our preferred pick  

  • DBS is our preferred pick and only BUY recommendation within our SG Banks coverage universe. 
  • DBS would gain the most from the hike in the FFR, and we believe further hikes in this rate through 2017 would widen the bank’s NIMs further. 
  • As to concerns on further loan loss provisioning for DBS, we have already factored in higher-than-usual provisions, and we believe this would be sufficient going forward.

Leng Seng Choon CFA RHB Invest | http://www.rhbinvest.com.sg/ 2016-11-09
RHB Invest SGX Stock Analyst Report BUY Maintain BUY 17.30 Same 17.300
NEUTRAL Maintain NEUTRAL 8.81 Same 8.81
NEUTRAL Maintain NEUTRAL 18.90 Same 18.90