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.
- Maintain OVERWEIGHT. BUY DBS and OCBC.
WHAT’S NEW
All three Singapore banks’ 1Q17 results exceeded expectations.
- 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.
Back to double-digit growth in fees.
- 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 benefitting from investments in digitalisation.
- 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.
Asset quality has stabilised.
- 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.
Well capitalised.
- 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.
ACTION
Maintain OVERWEIGHT.
- 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.
SECTOR CATALYSTS
- Rising interest rates and bond yields.
- Easing of pressure on asset quality from the O&G sector.
- Decent 2017F dividend yield of 2.9% for DBS and 3.4% for OCBC.
ASSUMPTION CHANGES
- As per results notes for DBS and OCBC.
RISKS
- Further economic slowdown and political risks in regional countries.
Jonathan Koh CFA
UOB Kay Hian
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http://research.uobkayhian.com/
2017-05-11
UOB Kay Hian
SGX Stock
Analyst Report
23.500
Same
23.500
11.700
Same
11.700
99998.000
Same
99998.000
