Banks - RHB Invest 2018-07-13: Overweight On Wider Net Interest Margin Offsetting Trade War Effects

DBS GROUP HOLDINGS LTD SGX:D05 UNITED OVERSEAS BANK LTD SGX:U11

Banks - Overweight On Wider Net Interest Margin Offsetting Trade War Effects

Upgrading sector call to OVERWEIGHT from Neutral.
Whilst the US-China trade war and the Singapore Government’s property cooling measures could slow loan growth, rising FFR and a firmer SIBOR will widen banks’ NIM.
Between 2003-2007 when the FFR surged, DBS’ and UOB’s P/BV escalated – this could potentially be repeated this time round, with market expecting two more rate hikes in 2H18, and more in 2019.
UOB is our preferred pick, given its lower exposure to China and potential for higher dividends. DBS is also a BUY. This report is shared at SGinvestors.io.

We upgrade the Singapore banking sector call to OVERWEIGHT from Neutral, largely premised on expectations of continued NIM widening which would drive earnings, and the fact that the recent share price correction has already factored in significant negatives from the Singapore Government’s property cooling measures. This report is shared at SGinvestors.io.

We forecast DBS and UOB to record FY20 average NIM of 1.96%, sharply wider than these two banks’ 1Q18 average NIM of 1.84%. This is premised on further hikes in the US federal funds rate (FFR) and the SIBOR.
We believe our NIM forecast for FY20 is conservative – this is as in the last cycle, after 4-5 years of FFR hikes (starting FY03), the three big banks recorded average NIM of 2.19% in FY08.

On a slightly negative note, the property cooling measures announced by the Singapore Government on 5 Jul 2018 to raise additional buyer’s stamp duty (ABSD) and lowering the loan-to-value (LTV) ratio, could dampen housing loan growth ahead. Having said that, we are forecasting mid-to-high single digit loan growth pa during FY18-20, which we see as already conservative.

The 3-month SIBOR has risen to 1.63%. We did a sensitivity analysis which examined the likely impact on earnings from a 10bps rise in the SIBOR, as well as a 1ppt fall in loan growth. Our conclusion is that a 1ppt slowdown in loan growth would be offset by a 10bps rise in the SIBOR.
In other words, the impact of the Singapore Government’s property cooling measures would be offset by the expected increases in the SIBOR over the next few quarters.

UOB is a beneficiary of rising FFR. We forecast its NIM to widen to 1.97% by FY20 (from 1Q18’s 1.84%). Its ROE also improved to 11% in 1Q18 from 4Q17’s 9.8%, and management is guiding for 12% ROE by end-2019.
More importantly, UOB’s management indicated its intention to lower CET1 CAR, and we see this translating into higher dividends, which could catalyse its share price higher. Our UOB Target Price is SGD33.30, equivalent to 1.43x 2019F book –similar to the P/BV level in 2007 after four years of FFR hikes.

Amongst the Singapore banks, DBS’ earnings will improve the most from every 1bp rise in the SIBOR. Whilst the ongoing trade war between the US and China could slow DBS’ loan growth (more than peers), we believe the rise in the SIBOR could offset the negatives.
Based on the previous FFR upcycle between mid-2003 and mid-2007, FFR rose to > 5% from 1%. During that time, DBS’ P/BV correspondingly rose to as high as 1.9x from 1.04x.
Currently, the bank is trading at only 1.26x 2019F book and our target P/BV is set at 1.47x, yielding our Target Price of SGD30.30.

Downside risks to our forecasts include global macro uncertainties such as the US-China trade war, higher impairment charges, and weaker NIMs.

Leng Seng Choon CFA RHB Securities Research | https://www.rhbinvest.com.sg/ 2018-07-13

SGX Stock Analyst Report BUY Maintain BUY 30.300 Same 30.300

BUY Maintain BUY 33.300 Same 33.300