Banks - RHB Invest 2018-08-06: Widening NIM Remains Catalyst Going Forward

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

Banks - Widening NIM Remains Catalyst Going Forward

Maintain OVERWEIGHT sector stance with UOB as our preferred pick.
2Q18 results were generally in line with expectations. There was respectable sequential growth in net interest income, mainly driven by loan expansion.
Looking ahead, net interest income should continue to expand from wider NIMs (as interest rates rise) and modest loan expansion.
For UOB, its high CET1 CAR of 14.5%, which is above the industry average of 13.8%, provides scope for more dividends going forward – we believe this could catalyse UOB’s share price beyond its better prospects from NIM expansion.
For DBS, it will gain relatively more from future FFR hikes – we also have a BUY on DBS.

Whilst 2Q18 NIMs were generally flattish q-o-q, DBS and UOB recorded NIM widening of 11bps and 8bps y-o-y respectively. Banks’ management teams maintain their guidance of NIM widening going forward, on higher SIBOR from a firmer federal funds rate (FFR). We forecast DBS’ and UOB’s NIMs to rise to 1.95% and 1.92% respectively in 2019.
On respectable 2Q18 sequential loan growth of 2-4%, the banks’ managements maintain their guidance of high single-digit y-o-y loan growth for end-2018 – the Singapore Government’s property cooling measures are not expected to impact loan growth this year. Overall, we can expect future expansion in net interest income to drive banks’ earnings.

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Our sensitivity analysis shows that a 1ppt fall in 2019 loan expansion (eg reduction to 6% growth from 7%) could be offset by a 10bps rise in the SIBOR and this could keep net profit unchanged, provided other factors are constant.
In short, we are not too concerned with banks’ future earnings being significantly weakened by a possible reduction in residential property sales.

Given the risk-off stance by high net worth clients, wealth management fees were lower q-o-q. This affected non-interest income contributions.
For DBS, its weakness in net trading income (down 38% q-o-q), amidst the flattening yield curve and widening Asian credit spreads, aggravated its contraction for non-interest income.

NPL ratios were stable q-o-q. Banks’ management teams see a continued positive outlook for asset quality.

2Q18 interim dividends were raised across the board. Looking ahead, UOB’s high CET1 CAR of 14.5% (ahead of the industry’s simple average of 13.8%) points to scope for more dividends going forward – UOB’s management has committed to a dividend payout ratio of 50%, subject to a minimum CET1 CAR of 13.5% and sustainable financial performances.
Our calculations showed that UOB could hypothetically give out SGD1.28/share of dividends and its CET1 CAR could remain at 13.5%.

Leng Seng Choon CFA RHB Securities Research | https://www.rhbinvest.com.sg/ 2018-08-06

SGX Stock Analyst Report BUY Maintain BUY 33.300 Same 33.300

BUY Maintain BUY 30.300 Same 30.300