Banking – Singapore - UOB Kay Hian 2017-05-11: 1Q17 Roundup ~ Easing Of Specific Provisions Across The Board

Singapore Banks Sector Outlook DBS GROUP HOLDINGS LTD D05.SI OVERSEA-CHINESE BANKING CORP O39.SI UNITED OVERSEAS BANK LTD U11.SI

Banking – Singapore - 1Q17 Roundup: Easing Of Specific Provisions Across The Board

We believe the key takeaway from 1Q17 results is the consistent feedback from all three banks that the worst in terms of NPL formation from the O&G sector is already over.
Specific provisions have also eased by 35-55% qoq across the board.
NIM expansion and recovery from wealth management are also positive news.

NIM expansion from DBS and UOB. DBS and UOB achieved NIM expansion of 3bp and 4bp respectively to 1.74% and 1.73%. Both banks benefitted from higher SIBOR and SOR.
DBS also experienced NIM expansion in Hong Kong on higher HIBOR and an improved CASA ratio and deposit franchise.

DBS, OCBC and UOB grew fee income by 15.9%, 28.6% and 17.3% yoy respectively. The recovery in wealth management was an important growth driver.
Fees from wealth management increased 26% at DBS, 70% at OCBC and 56% at UOB.
Wealth management accounted for 30% of total fees & commission at DBS, 45% for OCBC and 25% at UOB.

DBS has performed the best in cost containment with operating expenses declining 0.6% yoy.
Conversely, OCBC’s and UOB’s operating expenses increased by 5.2% (2.8% if we exclude impact from acquisition of Barclays wealth management business) and 7% yoy respectively.

NPL formation has eased for all three banks. NPL ratio improved by 1bp to 1.44% for DBS and 1.25% for OCBC.
Specific provisions dropped 55% qoq for DBS, 54% qoq for OCBC and 35% qoq for UOB.
All three banks gave assurance that larger troubled loans in the O&G sector have already been recognised as NPLs, and they do not expect lumpy NPLs going forward.

DBS has the highest CET-1 CAR of 14.2%, followed by 12.2% for OCBC and 12.8% for UOB.
DBS’ CET-1 CAR was boosted by gain of S$350m from divestment of PWC Building. Management at DBS will be conducting a review of its dividend policy as the bank has surplus capital.

Headwinds from the O&G sector have diminished as banks have already recognised the lumpy troubled accounts from the O&G sector as NPLs. Higher interest rates and bond yields are also positive for banks.
DBS and OCBC trade at 2017F P/B of 1.1x and 1.17x respectively, which is still below their long-term mean. They also provide decent dividend yield of 2.9% and 3.4% respectively.
DBS and OCBC provide upside of 21.8% and 41.9% respectively if they trade towards long-term mean P/B of 1.34x and 1.66x.

Jonathan Koh CFA UOB Kay Hian | http://research.uobkayhian.com/ 2017-05-11

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 23.500 Same 23.500

BUY Maintain BUY 11.700 Same 11.700

NOT RATED Maintain NOT RATED 99998.000 Same 99998.000