Banking – Singapore - UOB Kay Hian 2018-12-14: Goodbye 2018, Welcome 2019

Banking - Singapore ~ UOB Kay Hian Research | SGinvestors.io DBS GROUP HOLDINGS LTD (SGX:D05) OVERSEA-CHINESE BANKING CORP (SGX:O39) UNITED OVERSEAS BANK LTD (SGX:U11)

Banking – Singapore - Goodbye 2018, Welcome 2019

  • Banks outperformed by 4.9% in 1H18 but underperformed by 1.9% in 2H18 so far. The euphoria over interest rate hikes and NIM expansion in 1H18 gave way to concerns over escalation in trade conflict in 2H18.
  • While banks are typical cyclical plays, their emergence as yield plays would provide valuation support and limit potential downside in 2019.
  • Maintain OVERWEIGHT. BUY DBS and OCBC.
  • We prefer OCBC due to its potential to play catch-up in NIM expansion and dividend payout.



WHAT’S NEW


2018: A year of two halves.

  • 2018 started with a bang for banks. US GDP grew at a red-hot pace of 4.2% in 2Q18, bolstered by a cut in corporate income tax rate from 35% to 21% enacted in Dec 17. Banks’ share prices rallied, bolstered by expectations of rapid hikes in the Fed funds rate and faster NIM expansion. The positive sentiment was also aided by expectations of improved productivity and cost savings from Fintech investments. Singapore banks outperformed the FSSTI by 4.9% in 1H18.
  • The euphoria subsided when investors realised that the risk of escalation in the trade conflict is real. The Trump administration announced a 25% tariff on US$50b worth of Chinese goods in Jun 18 and a 10% tariff on another US$200b worth of Chinese goods in Sep 18 (step-up to 25% in Jan 19). DBS revised down guidance for loan growth from 8% to 6-7% for 2018 due to a slowdown in trade loans. Negative sentiment also affected fee income from wealth management for all three banks in 2H18. Singapore banks underperformed the FSSTI by 1.9% in 1H18.
  • The banking sector outperformed the FSSTI by a significant 5.3% in 1Q18. DBS led the pack with outperformance of 9.9% in 1Q18. The bigger underperformance of 1.4% occurred in 4Q18 so far. Similarly, DBS underperformed more at 3.8% in 4Q18. OCBC was the lone outperformer at 3.2% in 4Q18.


ACTION


2019: Continued headwinds from trade friction and geopolitical tensions.

  • We expect heightened uncertainty from trade frictions and geopolitical tension between the US and China to persist into 2019. The stock market and banks’ share prices are likely to be choppy.
  • While banks are typical cyclical plays, their emergence as yield plays would provide valuation support and limit the potential downside.

Singapore banks evolved into yield plays.

  • The finalisation of Basel III reforms in Dec 17 has paved the way for banks to hike their dividend payout ratios. DBS and UOB have done so in 2018. We foresee OCBC playing catch-up and hiking dividend payout to 45% in 2019 (2017: 37.7%) as its CET-1 CAR has risen to 13.7%.
  • We expect DBS, OCBC and UOB to provide attractive 2019 dividend yields of 5.0%, 4.3% and 4.9% respectively.

Attractive dividend yields provide valuation support.

  • Downside for share price is limited at 15% should dividend yield rise from 5% to 6%.

Maintain OVERWEIGHT.

  • We maintain our BUY recommendations for DBS (Target: S$29.50) and OCBC (Target: S$14.05).
  • We prefer OCBC due to its potential to play catch-up in NIM expansion and dividend payout.


DBS (Rating: BUY, Target Price: S$29.50)


Leadership renewal.

  • v has announced several senior-level organisational appointments aimed at grooming talent from within. Tan Su Shan, presently Group Head of Consumer Banking and Wealth Management, will succeed Jeanette Wong as Group Head of Institutional Banking with effect from 1 Feb 19. Sim S Lim, presently Singapore Country Head, will succeed Tan Su Shan as Group Head of Consumer Banking (CBG) and Wealth Management with effect from 1 Jan 19. Jeanette Wong will retire on 1 Mar 19.
  • DBS provides an attractive dividend yield of 5.2% based on DPS of S$1.20 for 2019F.


OCBC (Rating: BUY, Target Price: S$14.05)


Expanding into general insurance in Indonesia.

  • Great Eastern Holdings’ (GEH, SGX:G07) wholly-owned subsidiary Great Eastern General Insurance (GEGI) has entered into a share purchase agreement to acquire PT QBE General Insurance Indonesia (QBE Indonesia). QBE Indonesia is engaged in the manufacturing and distribution of general insurance products. It will become a wholly-owned subsidiary of GEH through GEGI. The consideration based on the book value of QBE Indonesia as at 30 Jun 18 is US$28.0m payable in cash.
  • We expect OCBC to increase its dividend payout ratio towards mid-40%, bringing 2019F DPS to S$0.48 which provides a dividend yield of 4.4%.


SECTOR CATALYSTS

  • Rising interest rates and corporate bond yields.
  • Improvement in dividend payouts and yields.


ASSUMPTION CHANGES

  • We maintain our existing earnings forecasts.


RISKS

  • Broader escalation of trade conflict between the US and China, affecting market sentiment and creating a dampener for global GDP growth.





Jonathan Koh CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2018-12-14
SGX Stock Analyst Report BUY MAINTAIN BUY 29.500 SAME 29.500
BUY MAINTAIN BUY 14.050 SAME 14.050
NOT RATED MAINTAIN NOT RATED 99998.000 SAME 99998.000



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