SG Banks (DBS vs OCBC vs UOB) - CIMB Research 2018-04-19: 1Q18F Preview ~ The Perfume Of Goldilocks Lingers

SG Banks (DBS vs OCBC vs UOB) - CIMB Research 2018-04-19: 1Q18F Preview ~ The Perfume Of Goldilocks Lingers Singapore Banks DBS vs OCBC vs UOB DBS GROUP HOLDINGS LTD D05.SI OVERSEA-CHINESE BANKING CORP O39.SI UNITED OVERSEAS BANK LTD U11.SI

SG Banks - 1Q18F Preview ~ The Perfume Of Goldilocks Lingers

  • It is all systems go for DBS as we expect the bank to record 1Q18F net profit of S$1,443m (+16% y-o-y).
  • Similarly, we expect healthy loan growth and sustained fee momentum for OCBC, and expect it to record 1Q18F net profit of S$1,160m (+19% y-o-y).
  • We believe UOB could surprise on higher NIM and lower credit costs (1Q18F: S$948m, +17% y-o-y). With a change in accounting, CIR would look lower.
  • We have, across-the-board, upgraded our Target Prices. Higher rates, sustained fees, benign credit environment, leaner capital structure and digitalisation gains should propel banks’ ROEs. 
  • Maintain Overweight; Top pick: DBS.



The perfume of Goldilocks lingers 

  • Flash GDP estimates showed Singapore’s economy registering an expansion of 4.3% yoy in 1Q18, led by the manufacturing and services clusters. In response to improving economic conditions, MAS has shifted to an appreciation bias for the S$NEER (first tightening since Apr 2012). 
  • System loans (DBU [domestic banking unit] + ACU) grew 1.2% m-o-m in Feb and 1.6% for 2M18. Loan growth was regional led by ACU (Asian currency unit, proxy for offshore lending) expanding 3.5% for 2M18.


DBS: all systems go! 

  • We/Bloomberg consensus expect 1Q18F net profit of S$1,443m/S$1,420m. 
  • On NII, we expect 2-3bp q-o-q growth in loans as well as 2-3bp q-o-q rise in NIM to c.1.8%. On non-II, we expect fee momentum to remain healthy. 
  • Positive surprises could come from trading income, positive jaws and lower credit costs. We factored in total credit costs at 24bp of loans for FY18F. Asset quality is set to be stable, with stable NPLs, NPL ratio and NPL coverage. 
  • DBS will report earnings on 30 Apr.


OCBC: FRS 109 could reduce Great Eastern’s (GEH’s) P/L volatility 

  • We/Bloomberg consensus expect 1QFY18F net profit of S$1,160m/S$1,176m. 
  • On NII, we expect 2-3bp growth in loans as well as 1-2bp q-o-q rise in NIM to c.1.68%. On non-II, we similarly expect fee momentum to remain healthy. 
  • Due to FRS 109, we note that there could be a y-o-y decrease in Great Eastern Holdings’ earnings as non-operating profit would be taken in OCI (other comprehensive income). Total credit costs could come in lower than the 20bp we baked in. 
  • GEH (Not Rated) will report earnings on 4 May; 
  • OCBC will report earnings on 7 May.


UOB: higher NIM, lower credit costs; CIR to be appear lower 

  • We/consensus expect 1QFY18F net profit of S$948m/S$981m. 
  • On NII, we expect 1-2bp growth in loans (behind peers) and 2-3bp q-o-q rise in NIM to c.1.84%. Non-II should be steady as WM and loan-related fees could more than offset seasonal weakness in trading income. 
  • With UOB adopting netting of fee expenses treatment (in line with peers), cost/income ratio (CIR) would be lower. The bank is guiding 44% CIR. We have penciled in total credit costs of 25bp, higher-end of the 20-25bp guidance. 
  • UOB will report earnings on 3 May.


Migration of GP to RLAR (regulatory loss allowance reserves) 

  • With FRS 109 kicking in since 1 Jan 2018, DBS and OCBC could transfer c.S$100m and c.S$400m respectively of excess general provisions (GPs) to RLAR. Unlike retained earnings, RLAR is non-distributable and is considered as Tier-2 capital instead of CET1.
  • We note that UOB does not have any excess GP; its Stage 1 & 2 expected credit loss (ECL) meet MAS 612’s 1% of un-collateralised credit exposures.


Maintain sector Overweight; DBS our top pick 

  • We expect SG banks’ ROEs to benefit from the tailwinds of
    1. higher rate environment,
    2. sustained fee income momentum,
    3. benign credit environment,
    4. leaner capital structure with clarity over Basel reforms and
    5. digitalisation productivity gains. 
  • We have, across-the-board, upgrade our Target Prices as we input sustainable ROEs to our GGM. We believe DBS would deliver superior returns over peers as it is the most rate-sensitive and the most digital-savvy bank. 
  • Sector downside risk includes disorderly rise in rates.





Upgrading target prices across the board 

  • YTD, DBS share price, OCBC share price and UOB share price have returned 17%, 8% and 10% respectively.
  • Instead of basing our GGM-based Target Prices against one-year forward ROEs, we now base them against what we deem as sustainable ROE. We also adjust our LTG assumptions. As a result, we now increase 
    1. DBS target Price from S$29 to S$33; 
    2. OCBC target Price from S$14 to S$15; and 
    3. UOB target Price from S$28 to S$33. 
  • Our order of preference is DBS, UOB and OCBC.



Highlighted Companies 


DBS GROUP HOLDINGS LTD (SGX:D05)  DBS (SGX:D05) Share Price  DBS (SGX:D05) Target Price  DBS (SGX:D05) Analyst Reports  DBS (SGX:D05) Corporate Actions  DBS (SGX:D05) Announcements  DBS (SGX:D05) Latest News  DBS (SGX:D05) Blog Articles

  • Rating: ADD, Target Price S$33.00.
  • We expect DBS to deliver superior returns over peers as it is the most rate-sensitive and the most digital-savvy bank. Our GGM-based Target Price implies 1.7x FY18 P/BV vs. 13.5% sustainable ROE.



OVERSEA-CHINESE BANKING CORP (SGX:O39)  OCBC Bank (SGX:O39) Share Price  OCBC Bank (SGX:O39) Target Price  OCBC Bank (SGX:O39) Analyst Reports  OCBC Bank (SGX:O39) Corporate Actions  OCBC Bank (SGX:O39) Announcements  OCBC Bank (SGX:O39) Latest News  OCBC Bank (SGX:O39) Blog Articles

  • Rating: ADD, Target Price S$15.00.
  • FRS 109 could reduce GEH’s P/L volatility but fundamentals of embedded value growth are intact. Upside risk could be sale of 30% of GEH Malayisa. Our GGM-based Target Price implies 1.5x FY18 P/BV vs. 12% sustainable ROE.



UNITED OVERSEAS BANK LTD (SGX:U11)  UOB (SGX:U11) Share Price  UOB (SGX:U11) Target Price  UOB (SGX:U11) Analyst Reports  UOB (SGX:U11) Corporate Actions  UOB (SGX:U11) Announcements  UOB (SGX:U11) Latest News  UOB (SGX:U11) Blog Articles

  • Rating: ADD, Target Price S$33.00.
  • For the coming 1Q results, we believe UOB could beat expectations on higher NIM and lower credit costs. Our GGM-based Target Price implies 1.5x FY18 P/BV vs. 11.5% sustainable ROE.






YEO Zhi Bin CIMB Research | http://research.itradecimb.com/ 2018-04-19
SGX Stock Analyst Report ADD Maintain ADD 33 Up 29.000
ADD Maintain ADD 15 Up 14.000
ADD Maintain ADD 33 Up 28.000



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