Banks - CIMB Research 2017-04-25: 1Q17 Earnings Preview

Banks - CIMB Research 2017-04-25: 1Q17 earnings preview Singapore Banks Earnings Preview DBS GROUP HOLDINGS LTD D05.SI OVERSEA-CHINESE BANKING CORP O39.SI UNITED OVERSEAS BANK LTD U11.SI

Banks - 1Q17 earnings preview

  • We expect NIMs to remain muted and provisions to still remain high in the upcoming 1Q17 results, hence core ROEs could stay depressed at 8-9%, similar to 4Q16’s.
  • We expect UOB’s core ROE to outperform peers due to its ability to tap on excess general provisions (GP), while specific provisions (SP) still remain high for oil & gas.
  • Possible bright spots include higher fee income (DBS, OCBC) and trading (UOB).
  • Expectations of higher interest rates and more stable economic outlook have driven sentiment. But we remain wary of anemic loan demand and its effect on margins.
  • Maintain Underweight. We would look to trim exposure prior to the expected lacklustre 1Q17 earnings. Order of preference remains UOB, DBS, and OCBC.

1Q17: Core ROEs could stay depressed 

  • The banks are due to report their 1Q17 earnings in the next 1-2 weeks. 
  • We expect core ROEs to stay depressed (8-9%), as NIMs could see only a 1-2bp pickup amid flat SIBOR/SOR despite a 25bp Fed rate hike. 
  • We expect effects from the oil & gas saga to spill over into 1H17 – provisions could remain high with Ezra and ECS filing for Chapter 11, and as collateral values of vessels continue to be written down. 
  • Higher fees and a better trading quarter could be the key positives to look out for.

DBS (results to be released on 2 May) 

  • We expect DBS to report a 1Q17 core net profit of S$760m (-17% qoq, -35% yoy), with the key culprit being higher provisions due to: 
    1. S$350m that will be put into general provisions (GP) from disposal gains on sale of the PwC building to Manulife, and 
    2. specific provisions (SP) for Ezra and EMAS Chiyoda Subsea (ECS) which filed for Chapter 11 and other oil & gas names. 
  • On a more positive note, we expect higher net interest income (NII) qoq to be driven by higher loan volume and a slight NIM expansion. Non-interest income should also be higher qoq as the recovery in fees after a seasonally-weak 4Q should more than offset lower trading income, which had an exceptional 4Q.
  • News reports claim that DBS has recognised its exposure to Ezra as an NPL in 3Q16 and made “suitable provisions”. We take a closer look at DBS’s new NPA formation and specific provisions (SPs) for new NPLs in 2H16 to get a clearer picture of how much more provisions could be required. 
    • In 3Q16, new NPAs amounted to S$1,055m, while SPs for new NPLs only amounted to $94m. 
    • In 4Q16, new NPAs of $789m (which likely included ECS) were met with $180m of SPs. 
  • Ezra’s Chapter 11 filings showed that DBS had US$272m (S$381m) of unsecured debt exposure to the company, and ECS’s Chapter 11 filings uncovered a US$84.6m (S$118m) unsecured exposure at DBS. Total exposures could be larger than the combined US$357m (S$499m) if secured debt (i.e. vessel financing) is included. 
  • Recall that of DBS’s S$2.6bn oil & gas exposure to 5 large names, c.S$800m has been taken in as NPLs as of end- 2016 – we think this could refer to its total exposure to Ezra and ECS. Compared to the S$274m of SPs for new NPLs made in 2H16, we estimate there could be a potential S$225m shortfall in SPs for Ezra and ECS for unsecured exposures alone, and c.S$500m shortfall in SPs in the worst-case scenario, assuming no recoverability in collateral value. 
  • As such, we think SPs for Ezra and ECS could amount to S$225m-500m in 1Q17, though likely at the low-mid-end of the range.

OCBC (results to be released on 9 May) 

  • We estimate that OCBC’s 1Q17 core net profit will come in at S$818m (+4% qoq, -4% yoy). 
  • We expect NIM to see a slight positive bias, similar to peers, and with loans still largely driven by market share gains in housing loans and cross-border loans. This will likely drive a better NII qoq, though lower yoy. 
  • We expect a recovery in fee income to be driven by the first full quarter of contributions from the integration of Barclays private wealth assets, which added US$13bn in AUM (+20%). 
  • Recall that OCBC saw high property disposal gains of S$83m in 4Q16 from the sale of a 12-storey office building and two shophouses; the absence of these gains likely dragged overall non-NII lower qoq. 
  • We expect provisions to still remain high for the same oil & gas accounts that were already previously identified, though total credit costs could have eased qoq.

UOB (results to be released on 28 Apr) 

  • We expect UOB’s core ROE to outperform peers in 1Q17, as provisions are most likely to be kept in line with its usual 32bp credit costs as it still has a GP buffer to tap on (GP/loans of 1.2%), which will allow it to do further GP writebacks to offset residual SPs for oil & gas accounts. 
  • While we expect core net profit growth of only 3% qoq and flat yoy to S$765m, the prior two periods have a high base effect as credit costs were lower at 22-24bps. 
  • Key points to look out for include: 
    1. higher securities yields with deployment of excess liquidity into higher-yielding assets, 
    2. better trading income with a pickup in sentiment in 1Q17, 
    3. steady operating expenses, and 
    4. absence of associates losses that were seen in both 1Q16 and 4Q16.

Maintain Underweight 

  • The sector is trading at 1.1x CY17 P/BV for a forecast ROE of 9-10%, which we deem expensive. We expect valuations to retrace to 1x P/BV, especially if ROEs can hardly meet the cost of equity. 
  • We would look to trim exposure prior to an expected lacklustre 1Q17 earnings season where ROEs could disappoint. Order of preference remains UOB, DBS, and OCBC. 
  • Risks to our call include a sharp rise in domestic interest rates and a meaningful sustained recovery in oil prices.

Jessalynn CHEN CIMB Research | http://research.itradecimb.com/ 2017-04-25
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