Singapore Banks - DBS Research 2016-12-07: There is hope

Singapore Banks - DBS Vickers 2016-12-07: There is hope Singapore Banks OVERSEA-CHINESE BANKING CORP O39.SI UNITED OVERSEAS BANK LTD U11.SI

Singapore Banks - There is hope

  • Raising earnings and TP on NIM expansion from FY17; keeping tab on slow loan growth, relatively high credit costs and NPL ratios to prevail for another 1-2 quarters.
  • Bulk of NPL issues should be over but there are still lingering concerns albeit on a smaller scale.
  • Growth opportunities are present in this uncertain environment; longer-term positive impact.
  • Upgrade OCBC to BUY (TP raised to S$10.30), UOB remains a HOLD (TP raised to S$21.80).

Raising earnings and TP on NIM expansion; OCBC upgraded to BUY, UOB remains a HOLD. 

  • We are raising FY17-18F earnings on higher NIM in anticipation of rising interest rates. 
  • We have also removed the risk premium attached to our valuation assumptions for a crisis mode previously. This results in a shift in our valuation to -1SD of the10-year P/BV mean for both OCBC and UOB which is at 1.1x BV. 
  • OCBC would be our preferred bet for three reasons: 
    1. its ability to maintain lower than peers’ credit cost trends, 
    2. it serves as a better wealth management play, and 
    3. possible earnings surprises from its insurance business in a rising interest rate environment 
    – earnings raised by 5-8%; TP raised to S$10.30, upgrade to BUY. 
  • UOB has kept its buffer for NPLs but it still lacks the allure for a wealth management play; higher NIMs should drive earnings – earnings raised by 10%; TP raised to S$21.80, maintain HOLD. 
  • Our forecasts are now above consensus estimates for FY17-18F.

Rising rates, higher NIM. 

  • With rate hikes almost a certainty in the coming quarters, the Singapore banks are almost surely to deliver higher NIM. 
  • We have imputed 8-10bps rise in NIM for FY17F. Our sensitivity analysis suggests that every additional 25bps increase SIBOR/SOR translates approximately to a 6bps increase in NIM (ceteris paribus), and will lift earnings by another 4%. 
  • Loan growth however will likely remain sluggish, limiting net interest income growth.

Bulk of the NPL issues is behind us; but there are still lingering concerns. 

  • The Ministry of Trade and Industry announced enhanced support measures for the oil and gas sector in the form of new incremental loan facilities from SPRING Singapore and IE Singapore to Singapore-based industry players. 
  • We believe this has brought some relief to companies which are experiencing tight cash flow, and hence extend some respite to banks in terms of NPL incidences. However, we remain watchful on some spillover effects to the construction sector and loans to individuals in the near term should the macro environment remain sluggish and unemployment levels become a concern. As such, credit costs may remain relatively elevated in FY17 (vs 5-year historical trends) albeit lower than FY16’s. 
  • Possible earnings surprises could emerge if asset quality recovers quicker than expected in FY17. Every 5bps decline in credit cost will lift earnings by 3%.

Market appears optimistic. 

  • The Singapore banks’ share prices have rallied a good 8% since Trump’s victory and with more certainty of rate hikes. This is even before any real numbers have filtered through. The market appears to be disregarding any downside risk to further NPL issues albeit on a smaller scale and the sluggish economy. 
  • A more sustainable earnings and growth trends to watch would be what banks can do over the longer term, especially in the wealth management space. The banks’ regional agenda remains intact.

LIM Sue Lin DBS Vickers | http://www.dbsvickers.com/ 2016-12-07
DBS Vickers SGX Stock Analyst Report BUY Upgrade HOLD 10.30 Up 8.600
HOLD Maintain HOLD 21.80 Up 18.10