Singapore Banks - RHB Invest 2018-05-16: NIMs Expansion & Loans Growth On Track

Singapore Banks - RHB Invest 2018-05-16: Nims Expansion & Loans Growth On Track DBS vs OCBC vs UOB Singapore Banking Stocks UNITED OVERSEAS BANK LTD SGX: U11 DBS GROUP HOLDINGS LTD SGX: D05

Singapore Banks - NIMs Expansion & Loans Growth On Track

  • Maintain NEUTRAL.
  • Net Interest Margins (NIMs) expansion remains a key catalyst to banks’ earnings growth, and a rising US FFR ought to drive SIBOR higher, thereby widening banks’ NIMs.
  • The banking operators are on target to hit a 2018 high single-digit loans expansion, given their low LDRs – 1Q18 loans expansion is also on track.
  • We like UOB, given its greater share of housing loans – which is likely to gain from optimism in the domestic residential property market – and high CAR (which provides scope for more dividends). DBS’ valuation is relatively high, in comparison.

DBS has the least loans exposure to Indonesia and Malaysia

  • DBS has the least loans exposure to Indonesia and Malaysia, while Oversea-Chinese Banking Corp (OCBC) and United Overseas Bank (UOB) have close to 12% of their loans exposed to Malaysia. In respect of currency exposure in IDR and MYR, the latter two banks’ exposure is in the low teens.
  • Whilst some investors may be concerned with the recent developments in Indonesia and Malaysia, we believe the risks to Singapore banks are low.

UOB has the greatest percentage share exposure to housing loans.

  • 27.6% of UOB’s loans are in the housing segment – this is higher than the 22-26% for its peers.
  • In the current environment of optimism in the Singapore housing market, we see housing loans growth continuing its momentum and driving net interest income for UOB
  • The management teams of the banks also cite a good pipeline for housing loans going forward.

We forecast 2018 loans growth of 8% for DBS and UOB.

  • The three banks recorded 1Q18 sequential loans growth of between 1.6-4.1%. Their management teams are guiding for high single-digit 2018 loans growth.
  • We are forecasting DBS and UOB to book 2018 loans growth of 8% each.

Widening NIMs is the share price catalyst.

  • Market expectations are for a few more hikes in the US federal funds rate (FFR) over the next 12 months. Based on data over the past 15 years, there is a clear positive correlation between the FFR and the 3-month SIBOR. We believe the 3-month SIBOR is on an upward trend, and this ought to help widen the banks’ NIMs.
  • DBS’ wealth management segment performed well, with 1Q18 fee and commission incomes rising 12% y-o-y – the wealth management segment’s 28% y-o-y growth was a key contributor. The bank’s assets under management (AUM) also rose 22% y-o-y to SGD208bn.
  • In 1Q18, asset quality has generally improved, evident from lower NPL ratios. The stable economic environment points to stabilisation in NPLs going forward. Lower provisions would also help banks maintain their earnings growth momentum.

UOB has the highest capital adequacy ratio (CAR) amongst peers.

  • Its CET1 CAR of 14.9% towers over its peers. As part of capital management, the management team has guided for more dividends going forward. This would also support UOB’s plans to raise its ROEs.

UOB is also more attractively priced that DBS.

  • The latter currently trades at 1.5x 2018 book vs its 5-year historical average of 1.17x. Our Target Price on DBS is pegged to 1.5x 2018 book – hence our NEUTRAL recommendation.
  • UOB, on the other hand, trades at 1.3x 2018 book, which is a smaller premium to its historical average of 1.24x. As our Target Price for UOB is pegged to 1.5x 2018 book, this is why we have a BUY recommendation on this counter.

Regional Exposure

  • In view of the developments in the region, we have analysed the exposure of Singapore banks to these occurrences.

As at end-March, DBS has negligible loans exposure to Malaysia.

  • Meanwhile, its other two peers have Malaysian loans exposure of close to 12% (Figure1).
  • Some investors see the recent 14th General Election (GE14) in Malaysia contributing to more market volatility, although the equity market has been relatively stable after the elections. The Malaysia exposure of Singaporean banks is also relatively small. Our view is that this exposure to our neighbour is not a negative for domestic banks.
  • Some quarters are concerned over the recent weakness of the IDR. OCBC and UOB’s exposure to Indonesia are also small – at single-digit percentage share levels.
  • In respect of loans exposure by currency, the combined share of MYR and IDR is in the low teens for both OCBC and UOB.

Against its peers, UOB has the greatest share loans exposure to housing loans,

  • ... at 27.6% of its loans book (Figure3). In the current scenario of many en-bloc sales and optimism on Singapore’s residential property market, we believe this high ratio for UOB is a positive for its future loans and NII growth.

On track for high single-digit 2018 loans expansion.

  • Singapore banks have recorded respectable loans growth over the past few quarters (Figure4). DBS recorded a 1.6% q-o-q loans expansion in 1Q18, and management guided for high single-digits loan growth for the full year. On our part, we are forecasting a 2018 loans expansion of 8% for DBS.
  • UOB is also on track for a full-year 2018 loans growth of in high single-digit territory – we are also forecasting for the bank to post 2018 loans growth of 8%.
  • Our forecasts for DBS and UOB’s loans growth are supported by their relatively low LDRs of between 85-95% (Figure5). 

Wider NIMs going forward.

  • Expectations of further hikes in the FFR in 2018 ought to help to drive SIBOR higher and contribute to elevated NIMs for Singapore banks. We forecast for DBS and UOB’s NIMs to widen further from their already-high 1Q18 levels.

Positive correlation between FFR and 3-month SIBOR.

  • Historically, the FFR is highly and positively correlated with the 3-month SIBOR. When the FFR started to trend up in mid-2000s, we saw a corresponding rise in the 3-month SIBOR, which has soared as high as 3%-plus. With expectations of FFR rising further from today’s levels, we expect the 3-month SIBOR to trend up further as well.

UOB has the highest CAR (with a CET1 CAR of 14.9%) amongst the banks,

  • ... and management has guided that more dividends can be expected going forward – this could come in as special or ordinary dividends.
  • UOB is also working to raise its ROEs, and this supports the argument for a lower CAR. We believe the potential of more dividends from the bank is a key catalyst to drive UOB share price higher.

Leng Seng Choon CFA RHB Invest | https://www.rhbinvest.com.sg/ 2018-05-16
SGX Stock Analyst Report BUY Maintain BUY 33.300 Same 33.300
NEUTRAL Maintain NEUTRAL 29.600 Same 29.600