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

Banks - RHB Securities Research 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.

NIM widening trend to persist.

  • 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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Potential loan growth slowdown (from property measures) could be easily offset by SIBOR rise.

  • 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.

Weakness in wealth management fees.

  • 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.

Credit costs remain benign.

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

UOB’s high CAR offers scope for more dividends ahead.

  • 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