Banking Singapore (DBS vs OCBC vs UOB) - UOB Kay Hian 2018-05-08: 1Q18 Round-up ~ New Normal Of Lower Credit Cost

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Singapore Banking Stocks DBS vs OCBC vs UOB 1Q18 Earnings DBS GROUP HOLDINGS LTD SGX: D05 OVERSEA-CHINESE BANKING CORP SGX: O39 UNITED OVERSEAS BANK LTD SGX: U11

Banking Singapore (DBS vs OCBC vs UOB) - 1Q18 Round-up ~ New Normal Of Lower Credit Cost

• All three Singapore banks beat expectations with earnings growing more than 20% y-o-y in 1Q18. 
• NIM expanded 5bp q-o-q for DBS and 3bp q-o-q for UOB due to higher SIBOR and SOR.
• Wealth management fees of DBS, OCBC and UOB grew 49%, 18.6% and 30% y-o-y respectively.
• Credit costs have fallen to just 13.1bp for DBS, 2.0bp for OCBC and 13.3bp for UOB as the banks have already recognised lots of NPL during 2H17 due to transition to SFRS (I) 9. 
• We see upside risk for interest rates. Prefer DBS as it is most sensitive to rising interest rates.
• Maintain OVERWEIGHT on the sector.

WHAT’S NEW

1Q18 earnings from all three Singapore banks beat expectations.

• Pick-up in loan growth to high single-digit yoy expansion. Loan growth was healthy at 1.6% q-o-q for DBS, 3.9% q-o-q for OCBC and 2% q-o-q for UOB. Key areas of growth were trade loans and residential property projects. OCBNC and UOB registered growth in Malaysia and Greater China. On a y-o-y perspective, loan growth was at high single-digit of 9.9% for DBS and 9.7% for OCBC.
• NIMs generally on an upward trend. NIM expanded 5bp q-o-q for DBS and 3bp q-o-q for UOB due to higher 3-month SIBOR and SOR, which gained 32bp and 48bp respectively in February and March. NIM was flat q-o-q for OCBC due to NIM compression of 17bp q-o-q for OCBC NISP.
• Double-digit growth in fees powered by wealth management. DBS, OCBC and UOB achieved double-digit growth in fees of 11.9%, 11.4% and 17.8% y-o-y respectively. The growth was powered by wealth management fees, which grew 49%, 18.6% and 30% y-o-y respectively. There was also healthy growth in contributions from fund management (OCBC: +16% y-o-y, UOB: +25.9% y-o-y), loan-related fees (UOB: +23.7% y-o-y) and credit cards (DBS +26.8% y-o-y).
• Provisions receded to pre-oil & gas levels. New NPL have eased 63% y-o-y for DBS, 24% y-o-y for OCBC and 1.9% y-o-y for UOB. The banks have also cleaned up by recognising more NPL during 2H17 due to the transition to SFRS (I) 9. Credit costs dropped to just 13.1bp for DBS, 2.0bp for OCBC and 13.3bp for UOB.
• Rock solid capital base. DBS and UOB are extremely well capitalised with CET-1 CAR at 14.0% and 14.9% respectively. OCBC’s CET-1 CAR was slightly lower at 13.1% but could be boosted if it divests 30% of Great Eastern Life (Malaysia) through an IPO or trade sale in 2H18 to comply with the limit on foreign ownership. OCBC plans to implement IRBA for OCBC Wing Hang in 2019.

1Q18 PROFIT & LOSS	DBS	OCBC	UOB
Net Interest Income	S$2,128m	S$1,415m	S$1,470m
	+16.2% yoy	+11.2% yoy	+12.8% yoy
	+1.5% qoq	-0.6% qoq	+0.6% qoq
Fee Income	S$744m	S$536m	S$517m
	+11.9% yoy	+11.4% yoy	+17.8% yoy
	+17.0% qoq	+9.2% qoq	+1.6% qoq
Insurance	n.a.	S$206m	n.a.
	n.a.	+145.2% yoy	n.a.
	n.a.	-33.5% qoq	n.a.
Net Trading Income	S$368m	S$94m	S$175m
	+36.3% yoy	-40.5% yoy	-33.0% yoy
	+61.4% qoq	-5.1% qoq	-5.9% qoq
Other Non-Interest Income	S$120m	S$82m	S$68m
	-74.5% yoy	-35.4 yoy	+38.8% yoy
	+27.7% qoq	-74.1% qoq	-9.3% qoq
Provisions	S$164m	S$12m	S$80m
	19.9bp	2.0bp	13.3bp
Net Profit	S$1,511m	S$1,112m	S$978m
	+21.4% yoy	+29.2% yoy	+21.2% yoy
	+26.5% qoq	+7.6% qoq	+14.4% qoq
Source: Respective companies, UOB Kay Hian

1Q18 KEY RATIO	DBS	OCBC	UOB
Net Interest Margin (NIM)	1.83%	1.67%	1.84%
	+5bp qoq	Unchanged	+3bp qoq
Loan Growth	+9.9% yoy	+9.7% yoy	+5.1% yoy
	+1.6% qoq	+3.9% qoq	+2.0% qoq
Deposit Growth	+9.7% yoy	+9.0% yoy	+5.4% yoy
	+0.6% qoq	+1.8% qoq	+0.4% qoq
NPL Ratio	1.62%	1.38%	1.72%
	-6bp qoq	-6bp qoq	-6bp qoq
Loan Loss Coverage	87.50%	76.9	80.70%
	+2.8ppt qoq	+0.4ppt qoq	-9.9ppt qoq
Core Equity Tier-1 CAR	14.00%	13.10%	14.90%
	+0.1ppt qoq	Unchanged	+0.2ppt qoq
Book Value Per Share (BVPS)	S$18.29	S$9.21	S$21.01
	+5.3% yoy	+6.1% yoy	+8.6% yoy
	+2.5% qoq	+2.8% qoq	+3.1% qoq
Source: Respective companies, UOB Kay Hian

ACTION

• Maintain OVERWEIGHT. We see upside risk for interest rates. 
• The Fed continues to monitor for signs of pick-up in inflation. While Fed Chairman Jerome Powell maintained that he sees “no evidence that the US economy is overheating”, there are quarters within the Fed that are concerned that the labour market is tight and wage inflation could pick up, necessitating a faster pace of hikes for the FED funds rate.

SECTOR CATALYSTS

• Rising interest rates and bond yields.
• Moderation of credit costs.

ASSUMPTION CHANGES

• As per results notes.
  • DBS Group Holdings (DBS) - 1Q18 NIM And Wealth Management Up; Credit Costs Down
  • Oversea-Chinese Banking Corp (OCBC Bank) - 1Q18 Let Down By Flat Net Interest Margin
  • United Overseas Bank (UOB) - 1Q18 Credit Costs Drop On Benign Credit Environment

RISKS

• Rapid increase in the federal funds target rate (steep rate hikes) that may trigger capital outflows from countries in Southeast Asia.

Jonathan Koh CFA UOB Kay Hian | https://research.uobkayhian.com/ 2018-05-08

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