Banks - RHB Invest 2018-11-07: Potential NIM Expansion Yet To Be Priced In

Singapore Banks - RHB Invest Research | SGinvestors.io DBS GROUP HOLDINGS LTD (SGX:D05) UNITED OVERSEAS BANK LTD (SGX:U11)

Banks - Potential NIM Expansion Yet To Be Priced In

  • Maintain OVERWEIGHT sector call after analysing the banks’ 3Q18 results, on future NIM widening as Singapore’s interest rates rise along with the hikes in the US FFR. We are forecasting FY20 average NIM of 1.98% for DBS and UOB, up from 3Q18’s average of 1.84%.
  • UOB is our preferred pick, given its potential for higher dividends as it has the highest CET1 CAR amongst its peers.
  • DBS is also a BUY, as its wealth management business shows promise of further growth beyond the strong 9M18 performance.

Our FY20 NIM forecast is lower than FY08’s 2.19%.

  • We expect DBS and UOB to record FY20 average NIM of 1.98%, sharply wider than the two banks’ 3Q18 average NIM of 1.84%. Further hikes in the US federal funds rate (FFR) and the SIBOR will drive this NIM widening.
  • We believe our NIM forecast for FY20 is conservative as in the last cycle, after 4-5 years of FFR hikes (starting FY03), the three big banks recorded average NIM of 2.19% in FY08.

General guidance of mid single-digit FY19 loan growth.

  • DBS’ management said that home mortgage growth this year has thus far been below earlier expectations – this could be partly due to the 5 Jul Singapore Government property cooling measures.
  • Banks have also reduced trade loans as yields are unattractive. We are forecasting FY19 loan growth of 6-6.5% for DBS and UOB.

Rising SIBOR seen to offset adverse effects from slow loan growth.

  • The 3-month SIBOR has risen to 1.76% from 3Q18’s average of 1.63%.
  • We performed a sensitivity analysis to examine the likely impact on earnings from a 10bps rise in the SIBOR as well as a 1ppt fall in loan growth. Our conclusion is that a 1ppt slowdown in loan growth would be offset by a 10bps rise in the SIBOR. In other words, the impact of the Singapore Government’s property cooling measures and unexciting trade loans should be offset by expected increases in the SIBOR over the next few quarters, based on our estimates.
  • See the statistics on DBS, OCBC, UOB's historical NIM, Loan Growth, Deposit Trend and also the financial data in the PDF report attached. 

UOB is our preferred pick.

  • UOB, like the other banks, is a beneficiary of the rising FFR. We expect its NIM to widen to 1.96% by FY20 from 3Q18’s 1.81%. Its ROE improved to 11.7% in 3Q18 from FY17’s 10.2%. More importantly, UOB’s management indicated its intention to lower its CET1 CAR, and we see this as translating into higher dividends, which could catalyse its share price higher.
  • Our UOB Target Price is at SGD30.80, equivalent to 2019F P/BV of 1.41x, which is sharply lower than the 2007 P/BV of 2.1x after four years of FFR hikes.

DBS is also attractive.

  • Amongst Singapore banks, DBS’ earnings will improve the most from every 1bp rise in the SIBOR. Whilst the ongoing trade war between the US and China could slow DBS’ loan growth more than its peers, we believe the rise in the SIBOR could offset the negatives.
  • Based on the previous FFR upcycle between mid-2003 and mid-2007, the FFR rose to > 5% from 1%. During that time, DBS’ P/BV rose to as high as 1.9x from 1x. Currently, DBS is trading at only 2019F P/BV of 1.24x, and our target P/BV of 1.54x yields a Target Price of SGD29.80.

Downside risks

  • Downside risks to our forecasts include global macro uncertainties such as the US-China trade war, higher impairment charges, and weaker NIMs.

Leng Seng Choon CFA RHB Securities Research | https://www.rhbinvest.com.sg/ 2018-11-07
SGX Stock Analyst Report BUY MAINTAIN BUY 29.800 SAME 29.800