Banks - RHB Invest 2017-01-03: Wider NIMs a Catalyst Going Forward

Banks - RHB Invest 2017-01-03: Wider NIMs a Catalyst Going Forward Singapore Banking Sector Outlook 2017 DBS GROUP HOLDINGS LTD D05.SI OVERSEA-CHINESE BANKING CORP O39.SI UNITED OVERSEAS BANK LTD U11.SI

Banks - Wider NIMs a Catalyst Going Forward

  • We believe the NPL ratio for Singapore banks would continue to rise, although at a slower pace, following the reported increase over the first nine months of 2016. Consequently, provisions should also remain elevated. 
  • However, expansion in NIM is the key point that we believe could trigger improvement in earnings for Singapore banks. Expected Fed Funds rate hikes in 2017 should lead to firmer SIBOR. 
  • Our sensitivity analysis shows that DBS’ net profit would rise the most for every bps rise in SIBOR – thereby supporting our BUY recommendation for this stock.

Deterioration in oil & gas asset quality - with an NPL ratio of 8%. 

  • We expect further weakness in asset quality for the three Singapore banks under our coverage (SG Banks) in 2017. Their asset quality had continued to deteriorate in 3Q16 (NPL ratio rising by 10-20bps to ~1.4%), with NPL ratio for oil & gas moving higher, e.g. +8% for Oversea-Chinese Banking Corp (OCBC). 
  • We note that the oil & gas sector has been plagued by the sharp decline in crude oil prices. However, the recent agreement by Organisation of the Petroleum Exporting Countries (OPEC) and non-OPEC members to share production cuts could firm crude oil prices and alleviate some NPL pressure in 2017. 
  • Besides weakness in oil & gas, we believe there is risk of rising small and medium enterprise (SME) NPLs amidst initial signs of slower payments by the sector in 3Q16.

However, the current situation is different from past slowdowns... 

  • During the 1998 Asian Financial Crisis (AFC), SG Banks recorded NPL ratios that were as high as 12%. This was due to sharply higher interest rates and plunging regional currencies. 
  • During the 2008 Global Financial Crisis (GFC), the NPL ratios rose to as high as 2.4%, but the impact on Singapore banks overall was short-lived, as central banks kept interest rates low.

...so we have factored in higher credit costs going forward. 

  • Collateral values of oil & gas loans have fallen sharply and banks have raised their provisions. Specific provisions (SP) credit costs for SG Banks range from OCBC’s low of 19bps to United Overseas Bank’s (UOB) 53bps. However, UOB released some of its general provisions (GP) to offset this. Consequently, the final impact to UOB’s P&L is muted. We have assumed higher credit costs for FY17, given the risk of further falls in oil & gas collateral values. 
  • UOB, with a GP to loan ratio of 1.4% (higher than the other peers’ average of 1.05%), could hypothetically release provisions equivalent to 18% of its PBT. However, we did not factor this provisioning release into our model.

NIM expansion the saving grace, with DBS Group Holdings’ (DBS) earnings to gain the most. 

  • 3Q16 NIMs were squeezed due to the low interest rates in Singapore. We expect US Fed Funds rate hikes in 2017, leading to a firmer SIBOR. This would widen local banks’ NIMs. 
  • Our sensitivity analysis shows that, in a steady state, a 10bps rise in SIBOR could raise DBS’, OCBC’s and UOB’s net profits by 1.7%, 0.8% and 1.2% respectively.

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 Fed Funds rate, and we believe further hikes in 2017 would further widen the bank’s NIMs. 
  • 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/ 2017-01-03
RHB Invest SGX Stock Analyst Report BUY Maintain BUY 18.380 Same 18.380
NEUTRAL Maintain NEUTRAL 8.810 Same 8.810
NEUTRAL Maintain NEUTRAL 18.900 Same 18.900