Singapore Banks - DBS Research 2018-10-19: Spotlight On NIM

Singapore Banking Sector - DBS Group Research | SGinvestors.io OVERSEA-CHINESE BANKING CORP (SGX:O39) UNITED OVERSEAS BANK LTD (SGX:U11)

Singapore Banks - Spotlight On Net-Interest-Margin

  • 3Q18 earnings trend likely to continue diverging; focus continues to be on NIM, non-interest income and loan growth trends.
  • Earnings for FY18F likely to be further bolstered by better-than-cycle average credit costs.
  • New restrictions on property developers added on to property cooling measures previously announced.
  • Prefer UOB to OCBC for more attractive dividend yield play, lesser exposure to wealth and trade.

What’s New

NIM – the bright spot to watch.

  • We continue to expect banks to see loan yields trending up in 3Q18, reflected by an increasing 3-month SIBOR which averaged at 1.5% during 2Q18 (1Q18: 1.3%). Recall that it takes up to 90 days for a full re-pricing to take place. Issuance of Additional Tier-1 (AT1) bank bonds and continuous liquidity buffering by some of the banks may marginally increase cost of funds.
  • We expect UOB to see flattish NIM for the quarter as it continues to drive volume growth supported by strong funding portfolio.
  • Meanwhile, we are also looking forward to OCBC’s NIM expansion as it starts to reprice its Singapore mortgages during the quarter and phase out more expensive deposits, apart from benefitting from increasing prime lending rate in Hong Kong.

Loan growth trajectory starts to diverge.

  • UOB and OCBC continue to maintain their high single-digit loan growth guidance for the year. 
  • Overall, UOB has less exposure to trade loans and should continue seeing good loan growth as it continues to drive volumes in 3Q18.

Weaker market activities to continue weighing on non-interest income.

  • We believe that wealth management income had peaked in 1H18 and with a more volatile market in 3Q18, while trading income is still likely to be weak, although mark-to-market positions are likely to fare better q-o-q as compared to 2Q18.

Earnings to be further bolstered by better-than-cycle average credit costs.

  • We continue to think that the overall asset quality at banks remains stable with the stabilisation of new NPL formation. That said, we have not priced in any oil & gas recoveries as vessel charter rates have yet to catch up with the improvement in activity levels.
  • We believe that the banks will benefit from better-than-cycle average credit costs in the year and both OCBC and UOB are likely to surprise on the upside in terms of reporting lower credit costs.

Regional operations continue to be mixed.

  • We expect OCBC to benefit from higher prime lending rates in Hong Kong amidst good loan growth in OCBC Wing Hang. 
  • In Indonesia, both OCBC and UOB are likely to continue seeing pressures in NIM due to sustained interest rate hikes as UOB continues to improve its local operations. 
  • Both OCBC and UOB’s Malaysia performance are expected to remain flattish q-o-q, pending clarity from Budget 2019. 
  • We continue to expect UOB to benefit strongly from growth in Thailand.

More to come for dividends?

  • UOB has verbalised its commitment to 50% dividend payout ratio (subject to CET1 [Common Equity Tier-1] ratio of > 13.5%) and we think there might be more positives to come for its 2H18 dividends as UOB has paid c. 41% of its 1H18 earnings.
  • On the other hand, OCBC has turned on the scrip dividend scheme in the last quarter in an attempt to shore up more capital and is unlikely to be able to pay more dividends till FY19. Once OCBC-WHB adopts the Internal Ratings Based (IRB) model for its capital by end-FY19, an additional 40bps of capital could be released.
  • As at 2Q18, the CET1 ratios for OCBC and UOB stood at 13.2% and 14.5% respectively.

Remain watchful on Singapore property market.

  • On 17 October, URA revised guidelines on the maximum allowable units in new private and condominium developers outside the Central Area. The new rules entail the following:
    1. The maximum number of dwelling units per development will be divided by 85 sqm vs the current 70 sqm,
    2. Reduction in bonus GFA cap for private outdoor spaces (balcony), and
    3. Introduction of a new Bonus GFA scheme for provision of indoor recreation (For more details, refer to Singapore Property: Government imposes new restrictions; a further headwind for property developers).
  • We remain watchful on the Singapore property market, and believe that impact from the new property cooling measures with the latest restrictions is not imminent. Pipeline of property-related loans is likely to see through at least 1H19.
  • While we expect some slowdown in mortgage growth, we think it is unlikely to see a huge correction (previous peak in mortgage growth was 16% in late 2012 when cooling measures were introduced, current mortgage growth is at the c.4% level).

Valuation and Recommendation

Prefer UOB to OCBC.

  • We continue to prefer UOB (BUY, Target Price: S$31.70) to OCBC (HOLD, Target Price: S$12.40).
  • Our BUY call on UOB is premised on its higher dividend yield with potential upside and continuous loan growth supported by its strong funding portfolio, on top of its strong capital position.
  • We currently have a HOLD call on OCBC as there are limited catalysts for OCBC’s share price currently due to its bigger exposure to trade and wealth management income which may moderate on the back of volatile market conditions.

Other updates

OCBC: Hong Kong Life Insurance gain to be recognised in 2H18.

  • OCBC terminated the sale of 33.33% stake in Hong Kong Life Insurance during the quarter as conditions were not satisfied by the long stop date of 30 September 2018, where OCBC was originally expected to receive proceeds of c. S$400m should the sale be completed by 3Q18. Hence, the deposit of c.S$124m to WHB will be recognised in 2H18.

Singapore Banks Peer Table - DBSV 2018-10-19

Sue Lin LIM DBS Group Research | https://www.dbsvickers.com/ 2018-10-19
SGX Stock Analyst Report HOLD MAINTAIN HOLD 12.400 SAME 12.400