Banking Sector - OCBC Investment 2018-11-22: Trade War Won’t Break The Banks! 

Banking Sector Singapore - OCBC Investment Research | SGinvestors.io DBS GROUP HOLDINGS LTD (SGX:D05) UNITED OVERSEAS BANK LTD (SGX:U11) OVERSEA-CHINESE BANKING CORP (SGX:O39)

Banking Sector - Trade War Won’t Break The Banks! 

  • Zoom out and look at bigger picture. 
  • Healthy earnings and prudent management. 
  • Overweight the sector. 



Don’t focus on a tree and miss the forest 

  • With the market in risk-off mode, banking stocks continued to languish after the recent 3Q18 results. See DBS share price, OCBC share price and UOB share price.
  • While 3Q18 net profit growth ranged from -4% to 6% q-o-q, Net Interest Margin (NIM) showed an improvement and averaged about 1.80% in 3Q18 (1.72% to 1.86%) versus the average of 1.78% in 2Q18 (range of 1.67% to 1.85%). 
  • Zooming out and looking at the 9-month report card, the three local banks reported combined net earnings of S$10.9b, up 25%. By any measure, this is a strong set of 9-month results.
  • While the general market sentiment is likely to remain weak, largely due to unclear impact from the on-going trade tensions, current valuations have priced in most of the potential negatives from the trade war. 


At current valuation, risk-reward ratio is favorable 

  • Based on the FTSE ST Financials Index (FSTFN), in the last seven years (to strip off the distorted effect from the Global Financial Crisis), the index traded from a low of 0.8x to 1.3x book, with the average at 1.1x. Based on current ratio of 0.97x, this is below historical average, effectively pricing in potential negatives.
  • Similarly, in terms of PE, the current forward PE of 11.9x is also lower than the average of 13.7x (range of 10.6x to 16.1x). 
  • See the PDF report attached for more statistics on valuation. 


Not a repeat of GFC! 

  • While market conditions are likely to be challenging in the months ahead, we believe that the current business environment is not the same as during the recent trough period in 2008/2009. As a recap, trough valuations were 8.6x earnings and 0.7x book.
  • The index is already down 10% YTD and down 18.4% from the year’s high, and we believe that downside is likely to be limited taking into consideration that on an annualised basis, the banking sector will report record earnings this year and poised to report another set of record earnings in 2019.
  • Based on consensus, the market is expecting the three banks to deliver earnings growth of 20% in FY18 and 9% in FY19. In addition, current dividend yields range from 3.7% to 5.7%.
  • We are re-iterating our overweight on the banking sector, highlighting it as one of our top picks for 2019. 





Carmen Lee OCBC Investment Research | https://www.iocbc.com/ 2018-11-22
SGX Stock Analyst Report BUY MAINTAIN BUY 30.830 SAME 30.830
BUY MAINTAIN BUY 28.800 SAME 28.800
NOT RATED MAINTAIN NOT RATED 99998.000 SAME 99998.000





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