Singapore Strategy 2019 ~ Banks - RHB Invest 2018-12-14: NIM Widening To Drive Earnings

Singapore Strategy 2019 ~ Banking Sector - RHB Research | SGinvestors.io DBS GROUP HOLDINGS LTD (SGX:D05) UNITED OVERSEAS BANK LTD (SGX:U11)

Singapore Strategy 2019 ~ Banks - NIM Widening To Drive Earnings

  • Maintain OVERWEIGHT sector call on future NIM widening, as Singapore’s interest rates rise along with the hikes in the US FFR.
  • We forecast FY20 average NIMs of 1.98% for DBS and UOB, up from 3Q18’s average of 1.84%.
  • UOB is our preferred pick, as its higher-than-peers CET1 CAR provides scope for more dividends ahead.
  • 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 conservative, and lower than the peak in the last cycle.

  • We expect DBS (SGX:D05) and UOB (SGX:U11) to record FY20F average NIMs of 1.98%, sharply wider than the two banks’ 3Q18 average NIM of 1.84%.
  • Whilst the US Fed Chairman’s speech on 28 Nov pointed to a more dovish stance, the market still expects further hikes in the FFR, which will drive 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 NIMs of 2.19% in FY08.

General guidance of mid-single-digit FY19 loan growth.

  • DBS’ management has said that home mortgage growth thus far is below earlier expectations – partly attributed to the 5 Jul Singapore Government property cooling measures. Banks reduced trade loans as yields are unattractive. We forecast 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 rose to the current 1.77% from 3Q18’s average of 1.63%. From our sensitivity analysis, we conclude that a 1ppt slowdown in loan growth would be offset by a 10bps rise in the SIBOR ie the impact of the Singapore Government’s property cooling measures and unexciting trade loans should be offset by increases in SIBOR over the next few quarters, based on our estimates.

UOB is our preferred pick.

  • UOB 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. 
  • See report: United Overseas Bank - RHB Invest 2018-12-14: Dividend Catalyst; Maintain Buy On Top Pick

DBS is also attractive.

  • Amongst Singapore banks, DBS’ earnings will improve the most from every 1bp rise in SIBOR. Whilst the ongoing trade war between the US and China could slow DBS’ loan growth more than peers, the rise in 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 to our forecasts include global macroeconomic 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/ 2018-12-14
SGX Stock Analyst Report BUY MAINTAIN BUY 29.800 SAME 29.800