Singapore Banks - RHB Invest 2018-01-05: SIBOR Spikes After Christmas

Banks - RHB Invest 2018-01-05: SIBOR Spikes After Christmas SG Banking Stocks UNITED OVERSEAS BANK LTD U11.SI DBS GROUP HOLDINGS LTD D05.SI

Singapore Banks - SIBOR Spikes After Christmas

  • The key to 2018 investments in SG Banks is margins expansion. The spike in 3-month SIBOR in late Dec 2017 should widen 2018 NIMs. 
  • 2018 loans growth is respectable, ie at mid-to-high single-digit rates. These positives should offset lingering concerns over oil & gas loans quality. We forecast 2018 net profit growth in the low teens. 
  • We are NEUTRAL-weight on the sector (with a slight bias to Overweight), as 2017 share prices have performed well. However, we are mindful that banks tend to perform well during interest rate upcycles. 
  • UOB is a BUY, on a share price catch-up theme and strong balance sheet strength.

SIBOR surged after the mid-Dec 2017 federal funds rate (FFR) hike. 

  • Whilst banks under our coverage’s (SG Banks) 9M17 NIMs widening was muted (due to soft interest rates), the recent spike in Singapore’s short-term interest rates are a key positive. The 3-month SIBOR rose to 1.51% currently (mid-Dec 2017: 1.21%), partly a consequence of the US Federal Reserve’s (US Fed) 25bps hike in the FFR to 1.5% (upper bound) in mid-Dec 2017.
  • Looking ahead, more FFR hikes in 2018 (consensus and our expectations: three hikes) should help to raise the SIBOR, which in turn ought to help widen NIMs. Amongst the banks, DBS Group Holdings’ (DBS) earnings are most sensitive to a SIBOR uptrend.

Mid-to-high single-digit loan growth expected for 2018. 

  • We are forecasting 2017 loans growth to average 5.8% for SG Banks, and 9M17 loans growth is on track. The outlook for 2018 loans growth remains bright, with their managements guiding for mid-to-high single-digit loans growth. 
  • Recent activity in residential property en-bloc sales is a contributor to loans expansion. Strong Singapore 4Q17 GDP numbers could also lead to more investments by corporates (in relevant sectors) and, correspondingly, strong loans disbursement.

Oil & gas loans still stressed. 

  • Banks’ 3Q17 financial results point to continued deterioration in the oil & gas asset quality. We forecast continued rising NPL ratios going forward. 
  • Although crude oil prices have strengthened over the past few months, managements are of the view that oil & gas support service firms are likely to face pressure from low charter rates and excess systemic capacity. Hence, this segment could see asset quality deterioration.

Specific credit costs may vary going forward. 

  • In 3Q17, DBS’ specific credit cost of 195 bps was way ahead of its peers – Oversea-Chinese Banking Corp (OCBC) (24bps) and United Overseas Bank (UOB) (37bps). The variance was due to DBS classifying more of its oil & gas support service exposures. 
  • Looking ahead, we forecast sequentially lower specific credit costs for DBS, as the bulk has already been made as at Sep 2017. We have also assumed relatively stable credit costs for UOB for 4Q17.

For 2018, banks are likely to gain from widening NIMs. 

  • International Financial Reporting Standard 9’s (IRFS 9) implementation may also give them the option to write-back some of the excess GPs. Yet, these positives could be partly offset by continued lingering concerns over oil & gas NPLs. 
  • SG Banks’ strong 2017 share price performance would also limit upside. Hence, we recommend clients to be NEUTRAL-weight (with a slight bias towards Overweight). The interest rate upcycle’s positive impact should not be taken lightly too.

UOB is our only BUY recommendation within our SG Banks coverage universe. 

  • Firstly, UOB has underperformed its peers in total returns to investors (since the start of 2017) – recording 36% vs the three banks’ 46% average. 
  • The recent optimism in the residential property market – as reflected by en-bloc property transactions – is another positive for UOB, which has 27% of its loans in mortgages. This is higher than the 25% average for the SG Banks. 
  • Lastly, UOB has a strong balance sheet, which is evident from its high provisioning ratios.

Leng Seng Choon CFA RHB Invest | http://www.rhbinvest.com.sg/ 2018-01-05
RHB Invest SGX Stock Analyst Report BUY Maintain BUY 28.880 Same 28.880
NEUTRAL Maintain NEUTRAL 23.330 Same 23.330