Banks - RHB Invest 2017-07-19: Initial Signs Of SIBOR Uptrend

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

Banks - Initial Signs Of SIBOR Uptrend

Since the end of Jun 2017, the 3-month SIBOR has risen 12bps to 1.115%. This should underpin improvement in Singapore banks’ net interest income and widen NIMs going forward.
We have already factored in wider NIMs for the three banks as we go into 2018. Our sensitivity analysis points to DBS’ earnings rising the most from a SIBOR increase, whilst the other two banks would also gain although at a slightly smaller magnitude.

However, our sector Top Pick remains UOB given:
1. DBS’ share price outperformance with total shareholder return of 39% over the past 12 months, compared with OCBC’s share price performance of 28% return and UOB’s share price performance of 32% return;
2. UOB’s stronger balance sheet strength;
3. UOB’s ability to sequentially grow net interest income faster than peers over the past three quarters.

From 0.996% at the end of June, the 3-month SIBOR has risen to 1.115% as of 18 Jul (or a rise of 12bps). The impact from rising Fed Funds rate is starting to show in the 3-month SIBOR’s ascent.
Looking ahead over the next 12 months, we maintain our view that the 3-month SIBOR will continue to trend upwards, which would in turn contribute to the Singapore banks’ recording wider NIMs and higher net interest income.
We have already factored into our financial models, widening NIMs for the three Singapore banks as we go into FY18.
In addition, we provide below a sensitivity analysis on the banks’ earnings to rising SIBOR. It is clear that DBS is the key beneficiary of a rising SIBOR, as a 10bps SIBOR rise would contribute to a 1.2% increase in DBS’ net profit based on our estimates. The other two banks would also gain albeit at a smaller magnitude.
Our Top Pick remains UOB given its ability to grow sequential net interest income faster than peers over the past three quarters, and its highest loan loss coverage amongst peers.

Leng Seng Choon CFA RHB Invest | http://www.rhbinvest.com.sg/ 2017-07-19

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