DBS GROUP HOLDINGS LTD (SGX:D05)
OVERSEA-CHINESE BANKING CORP (SGX:O39)
UNITED OVERSEAS BANK LTD (SGX:U11)
Banking – Singapore - 3Q18 Round-Up: Steady Performance In Volatile Environment
- All three Singapore banks met our expectations. DBS and OCBC achieved NIM expansion and strong growth in net trading income. OCBC’s CET-1 CAR improved substantially by 0.4ppt q-o-q to 13.7% and has caught up with its peers’. Asset quality was largely stable.
- Maintain OVERWEIGHT.
- We prefer OCBC (SGX:O39) due to its potential to catch up in NIM expansion and dividend payout.
WHAT’S NEW
- DBS (SGX:D05), OCBC (SGX:O39) and UOB (SGX:U11) reported net profit of S$1,413m (+76% y-o-y), S$1,245m (+12% y-o-y) and S$1,037m (+17% y-o-y). Large provisions for exposures to the Oil & Gas sector last year had accentuated y-o-y comparisons.
- On a sequential basis, DBS and OCBC eked out positive earnings growth of 6% and 3% q-o-q respectively.
Moderation in loan growth.
- DBS and OCBC registered faster loan growth of 8.2% and 10.4% y-o-y respectively. On a q-o-q basis, loans expanded 0.7% at DBS, 1.7% at OCBC and 2.2% at UOB, driven mainly by corporate loans.
- Residential mortgages have slowed after the introduction of cooling measures and expanded only 0.7% q-o-q at DBS and 1.0% q-o-q at UOB. In fact, mortgages contracted slightly by 0.3% q-o-q at OCBC.
Divergent trend in NIM.
- OCBC finally caught up with peers with NIM expanding 5bp q-o-q. OCBC raised interest rates for residential mortgages in Singapore since August with the full impact expected in 4Q18. It also trimmed surplus US$ fixed deposits (US$ loan-to-deposit ratio has improved from 65.6% in 1Q18 to 76% currently). Investors were disappointed as UOB’s NIM compressed by 2bp q-o-q. UOB built up deposits to meet projected business growth ahead of further increases in interest rates. UOB’s NIM for Indonesia (4.4% of total loans) also narrowed by a significant 69bp q-o-q to 3.53%.
Slowdown in fees and commissions.
- Growth in fees slowed to just 1.5% y-o-y for DBS, 2.9% y-o-y for OCBC and 1.5% y-o-y for UOB. High net worth clients were spooked by the escalation of trade frictions and adopted a risk-off approach. Contributions from wealth management dipped slightly by 1.6% q-o-q for DBS and 2.7% q-o-q for OCBC. Fees for credit cards grew 33% y-o-y for DBS, 15% y-o-y for OCBC and 7% y-o-y for UOB.
Treasury activities benefitted from customer flows.
- DBS and OCBC registered strong net trading incomes of S$354m (+33.6% y-o-y, +55.9% q-o-q) and S$213m (+80.5% y-o-y, +10.9% q-o-q). We expect banks to have benefitted from wider spreads for foreign exchange transactions due to volatility in regional currencies.
Asset quality benign.
- DBS’ and OCBC’s NPL ratios were unchanged at 1.56% and 1.58% respectively. UOB’s NPL ratio improved 4bp q-o-q to 1.64% as the bank disposed its portfolio of impaired consumer loans in Thailand.
OCBC caught up in capital adequacy.
- OCBC’s CET-1 CAR registered the most significant improvement of 0.4ppt q-o-q to 13.7%.
ACTION
Maintain OVERWEIGHT.
- There is a glimmer of hope that trade conflicts between the US and China, the two largest economies in the world, could be resolved. The two presidents, Donald Trump and Xi Jinping, are scheduled to have a “meeting plus dinner” on 1 Dec 18 in Argentina after the G20 summit.
- While the challenges are formidable, we are cautiously optimistic that differences could be narrowed and a win-win trade deal could eventually be formulated.
Prefer OCBC.
- OCBC (SGX:O39) is expected to play catch-up in NIM expansion and improve its dividend payout. OCBC’s CET-1 CAR improved 0.4ppt q-o-q to 13.7% in 3Q18, at the higher end of the target range of 12.5-13.5%. CET-1 CAR could further improve as OCBC implements an internal ratings-based approach (IRBA) to compute risk-weighted assets for OCBC Wing Hang in 2019/20.
- OCBC could increase dividend payout ratio towards mid-40%, bringing 2019F DPS to S$0.48, which provides a dividend yield of 4.2%. The stock also trades at an attractive 2018F P/B of 1.10x, which is more than one SD below long-term mean.
SECTOR CATALYSTS
- Rising interest rates and corporate bond yields.
- Improvement in dividend payout and yield.
ASSUMPTION CHANGES
- As highlighted in results notes.
RISKS
- Rapid increase in the federal funds target rate (steep rate hikes) that may trigger capital countries in Southeast Asia.
Jonathan Koh CFA
UOB Kay Hian Research
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https://research.uobkayhian.com/
2018-11-07
SGX Stock
Analyst Report
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