Singapore Banking And Finance - Phillip Securities 2017-09-18: Stronger Economy And Higher Dividends Expected

Singapore Banking And Finance - Phillip Securities 2017-09-18: Stronger Economy And Higher Dividends Expected Singapore Banking Sector DBS vs OCBC vs UOB DBS GROUP HOLDINGS LTD D05.SI OVERSEA-CHINESE BANKING CORP O39.SI UNITED OVERSEAS BANK LTD U11.SI

Singapore Banking And Finance - Stronger Economy And Higher Dividends Expected

  • We expect Singapore banks to finally see better loans volume and rate dynamics as the economy and capital markets improve.
  • Negative Economic Value and record capital ratios will encourage banks to return excess capital to shareholders in the form of dividends.
  • We maintain our Reduce rating on UOB and Neutral rating on OCBC. And we upgrade our rating on DBS from Reduce to Accumulate.

And why did we upgrade DBS? 

  • As competition increase, we expect NII to be led by loans volume growth. DBS has the highest Singapore CASA ratio of 91% and the largest overall deposit base of S$342.9bn. This will mean UOB and OCBC will not be able to lend more competitively than DBS. 
  • We believe this is the advantage DBS enjoys over its peers, especially against foreign banks like HSBC and BOC as they begin to compete for loans in Singapore.

Loans Growth will be the driver for better Net Interest Income (NII).

  • Singapore banks’ NII performed better because of stronger loans growth. The actual loans growth rate in 1H17 had exceeded bank managements’ guidance of mid-single digit loans growth. The recent improvements to economic outlook across Singapore banks’ key markets including Malaysia and Hong Kong will continue to support loans growth and positive loans volume and rate dynamics. However, we expect the pass through of higher interest rates to be crimped by competition especially in the property sector therefore Net Interest Margins (NIM) expansion may be more subdued.

We expect excess capital to be returned to shareholders in the form of higher dividends.

  • We think that the build-up of excess CET 1 above the regulatory hurdle of 6.5% and the threat of negative economic value as Weighted Average Cost of Capital (WACC) exceeds Return Of Invested Capital (ROIC) may spur the Singapore banks to return some excess capital to shareholders. 
  • We opine that the banks may experience lower ROIC because of our view of a more subdued NIMs. Therefore capital that cannot be deployed to improve ROIC above WACC may instead be returned to shareholders.


Upgrade to NEUTRAL Singapore Banking Sector – 

  • We upgrade the Singapore Banking Sector to Neutral weight from Underweight. Macro conditions have been more positive than we expected. We expect higher interest rates and loan volume to help drive NII higher.
  • We maintain our Reduce rating on UOB and Neutral rating on OCBC. And we upgrade our rating on DBS from Reduce to Accumulate. (See report: DBS Group Holdings Limited - Standing Firm Amid Stiff Competition)

How did Singapore banks’ share price move in comparison with interest rates? 

  • Contrary to market expectations that a rising SIBOR is always beneficial for Singapore banks, we have seen increasing SIBOR result in a steep fall in share prices. Therefore we highlight that the conditions in which SIBOR moves are more important than the direction of movement.

How was the progress for the Singapore banks so far? 

a) Strong growth in DBS and OCBC WM; UOB is lagging behind.

  • OCBC’s stronger WM contributions came from the completion of Barclays WM business acquisition in 4Q16 and the broader mix of WM products and services from its bancassurance arm and the Lion Global franchise. Owing to improving investor sentiments or risk appetite from the start of 2017, expect OCBC WM to continue performing well on the back of growing AUM and product synergies. 
  • OCBC has announced the acquisition of NAB’s private wealth business in Singapore and Hong Kong which is expected to be completed at the end of 2017 subject to regulatory approval.
  • DBS’ WM growth came from the upper affluent clientele through the Treasures, Treasure Private Client and Private Bank platforms. We believe that DBS’ niche in the upper affluent market segment provides it with long term consistent growth.
  • UOB is lagging behind in WM compared to peers. UOB AUM from Privilege Banking, Privilege Reserve and Private Bank is only S$99bn. This is significantly lower than DBS AUM from Treasures, Treasures Private Client and Private Bank is S$175bn.

b) Quarterly provision expense may become more volatile as coverage ratios remain at historically low levels.

  • Offshore oil and gas vessel owners have been grappling with weak cash flow for about 2 years. Charter rates and charter tenures remain low. Therefore there are risks of elevated net NPL from the sector. Write offs could become lumpier too as the prospects for recovery remains poor. 
  • Given the low coverage ratios, Singapore banks have less buffer to smoothen out the provision expense but will have to respond with the appropriate amount of provisioning expense in any given quarter if NPL formation becomes elevated.

c) Singapore GDP growth forecast and PMI have improved. 

  • A better economy will support loans growth, asset quality and positive loan volume and rate dynamics.

d) Negative Economic Value may encourage banks to return excess capital to shareholders.

e) Singapore home loans have become more competitive and are more detached from SIBOR even as rates are rising.

  • Loan packages unpegged to benchmark interest rates were offered even as interest rates were at low point. DBS had introduced the FHR package in 2014 followed by OCBC and UOB. The FHR uses the banks’ deposit rates which are stable but it also means that the banks will not benefit as much from a faster rising SIBOR.
  • Currently, DBS no longer offers SIBOR-pegged loans and the application take up rate for the FHR package is 90%. OCBC and UOB continue to offer SIBOR-pegged loans.
  • Recently even as SIBOR is rising, banks dangled fixed rate packages to capture market share. DBS offers a 3-year fixed package at 1.68% which was the only one in the market for some time. Then in the first week of September; UOB, HSBC and BOC introduced similar packages. DBS’ management had mentioned in 1Q17 results briefing that their competitors will have difficulty matching the 1.68% 3-year fixed package. OCBC had not followed with similar packages.
  • We estimate that the Singapore housing loans makeup to about 15% to 20% of the Singapore banks’ loan books therefore as the Singapore housing market shifts away from SIBOR to FHR and fixed rate packages, this portion of the portfolio will become less sensitive to rising SIBOR. Owing to the competitive pressures and desire to build higher quality loan assets, we expect NII to be driven more by loans growth and less by higher interest rates.

Jeremy Teong Phillip Securities | http://www.poems.com.sg/ 2017-09-18
Phillip Securities SGX Stock Analyst Report ACCUMULATE Upgrade REDUCE 21.45 Up 17.920
NEUTRAL Maintain NEUTRAL 10.810 Same 10.810
REDUCE Maintain REDUCE 20.180 Same 20.180