Singapore Banks - CGS-CIMB Research 2019-01-28: 4Q18F Preview ~ Seasonally Weaker


Singapore Banks - 4Q18F Preview: Seasonally Weaker

  • We expect a flattish q-o-q NIM for 4Q18F on reduced corporate loan demand amidst high funding costs. Our FY19F NIM expansion is now 3-5bp.
  • The seasonally-weaker 4Q for non-II could be marred by further risk-off appetite, affecting trading and wealth. We see UOB the least affected by this.
  • We think valuations are decent at 1.1x CY19 P/BV (ROE: 11.9%), below long-term mean of 1.3x. New order of preference: UOB, DBS, and OCBC.

We expect further expansion in FY19 NIMs, albeit at a slower pace

  • We believe that 4Q18 NII will still be driven by the lagged pass-through effects of a rise in SIBOR and higher mortgage board rates into retail loan yields. However, NIM expansion may be lower than expected due to tight corporate lending rates amid the sluggish economy alongside heightened funding costs.
  • Recall that foreign banks in Singapore had spurred intense deposit rate competition in recent months to maintain minimum net stable funding ratios. We forecast FY19 NIMs to still increase, albeit by a smaller 3-5bp, as prior rate hikes set into asset yields.
  • Flattish q-o-q NIM expansion is expected in 4Q18.

Continued risk-off stance may dampen non-II in 4Q18

  • We expect DBS’s and OCBC’s wealth management (WM) and treasury units to be particularly affected by market volatility and reduced client activity given their larger private banking franchises. OCBC’s insurance arm may further render it vulnerable to sizeable MTM losses.
  • UOB could be least affected by the volatility as its WM unit targets the mass affluent, thus generating more stable, less market-dependent, recurring fees.

Tempered loan growth balanced by stronger risk oversight

  • According to MAS data, system loan growth had dwindled from a respectable 4.7% in 1H18 to a tepid 0.3% in Jul-Nov 18 on the back of ripple effects from the trade war tensions into ASEAN economies.
  • From a risk-reward perspective, strong loan growth may come at the expense of broad margins given a likely aversion towards excessive risk-taking in this subdued economic climate and a reduced appetite for capex spending.

We forecast stable asset quality, although with higher credit costs

  • We foresee that asset quality is likely to stay stable with NPLs hovering at current levels. Recoveries of O&G exposures remain dim due to depressed charter rates and utilisation levels.
  • We continue to expect rising credit costs towards normalised levels for 4Q18.

Earnings expectations

DBS (results to be released on 18 Feb)

  • We expect DBS GROUP HOLDINGS LTD (SGX:D05) to report a 4Q18 net profit of S$1.32bn (-6.5% q-o-q, +8.4% y-o-y).
  • We understand that non-trade corporate loan growth has kept up momentum, although unattractive pricing on trade loans has continued to be a dampener on overall growth. We forecast DBS’s loans to expand 0.7% q-o-q in 4Q18 (FY18: +6.1% y-o-y).
  • An increase in mortgage board rates and continued pass-through from SIBOR, despite flattish margins in HK due to a choppy HIBOR, may well give asset yields a boost, although we think that increased funding costs across the banking system may dull NIM expansion. We expect DBS’s NIM to have progressed 1bp q-o-q to 1.87% in 4Q18 (FY18: +10bp y-o-y to 1.85%).
  • Wealth management, investment banking and trading income are likely to have been a drag on earnings due to the volatile market conditions.

OCBC (results to be released on 22 Feb)

  • We estimate OVERSEA-CHINESE BANKING CORP (SGX:O39)’s net profit to come in at S$1.09bn in 4Q18 (-12.9% q-o-q, +12.2% y-o-y).
  • Muted wealth and trading income – primarily due to MTM losses on OCBC’s insurance portfolio due to unfavourable market conditions – are likely to have been the key drag on earnings. Consistent with our expectations for its peers, we think that heftier credit costs towards normalised levels are in view. OCBC is likely to have been hit the hardest, in part for its US$122.7m exposure to Coastal Oil Singapore which, we understand, could have been exhibiting positive cash flows up until liquidation, as well as the particularly muted levels of provisions in 9M18. The implication of the supposed cash flows from Coastal Oil would mean that this exposure would not have been flagged as a Stage 2 exposure under SFRS 9 despite weakened operating metrics, and thus would not have been sufficiently provided for.
  • Barring further benefits on margins from a release in excess liquidity as in 3Q18, we believe that NIM expansion in 4Q18 may have been muted due to fierce fixed deposit rate competition in recent months. We forecast OCBC’s NIM rising 1bp q-o-q in 4Q18 to 1.73% (FY18: +5bp to 1.7%).

UOB (results to be released on 22 Feb)

  • We forecast UNITED OVERSEAS BANK LTD (SGX:U11) to post a net profit of S$917m in 4Q18 (-11.6% q-o-q, +7.5% y-o-y).
  • We think that UOB is likely to have been the least-affected by market volatility, given that its wealth management products are less market-driven and generate stable, recurring fees.
  • We understand that loan growth may have been a bright spot for UOB in 4Q18, as previously-delayed capex commitments get drawn down. However, we note that the bank’s modest appetite for risk comes at the cost of reaping broad margins; reduced risk appetite would translate into extending lower-yielding loans. On this front, we estimate that NIMs could be flattish at 1.81% in 4Q18, thus resulting in a 5bp y-o-y NIM expansion to 1.82% in FY18.

Valuation and recommendation

New order of preference: UOB, DBS, then OCBC

  • Maintain Overweight on Singapore banks on account of their attractive valuations; the sector trades at 1.2x CY19 P/BV for a forecast ROE of 11.9%. While challenging market conditions may weigh on banks’ 4Q18 performance, we believe these weaker sentiments have already been priced in.
  • We swap our order of preference for Singapore banks to UOB, DBS, and then OCBC (from OCBC, UOB, then DBS).
  • We think that UOB is well-placed to benefit from a displacement in supply chains from Greater China into neighbouring ASEAN countries in the event that the US-China trade war tensions escalate. Having the smallest wealth franchise among peers, UOB is also less likely to be affected by subdued client activity in uncertain and volatile markets.

We upgrade DBS to Add, our calls on UOB and OCBC remain unchanged

  • We upgrade DBS to ADD with a higher target price of S$29.00 (from S$27.00). We cut DBS’s EPS by 1- 4% for FY18-19F to adjust for lower NIM expansion and weaker market-based fees. In a low interest rate environment, we think DBS could still be better positioned than its Singapore peers to capture NIM expansion, given its sticky CASA deposit base. We roll over to CY19 and raise our GGM-based Target Price to S$29.00 (1.4x CY19F P/BV). We think DBS’s valuations have become more palatable, now close to its long-term average of 1.2x CY19 P/BV vs. ROE of 12.0%. See report: DBS Group - Hope For NIM Expansion, Upgrade On Valuations.
  • We cut OCBC’s FY18-20F EPS forecasts by 4- 10% as we adjust our earnings estimates to account for slower NIM growth. We maintain our Add call on OCBC with a GGM-based target price unchanged at S$14.00. We think that a larger dividend payout above the 37% declared in FY17 could be on the cards in view of the bank’s stronger 13.6% CET-1 capital ratio in 3Q18. See report: OCBC - Potentially Closing The Dividend Gap.
  • As we adjust our earnings estimates for lower NIM expansion, UOB’s FY18-20F EPS is fine-tuned by -1.8% to 1.4%. Although NIM expansion was likely more modest for UOB given its smaller CASA funding cost shield compared to peers, we think that the bank was relatively shielded against further market weakness given its smaller exposure to market-related fee income and it is well placed to benefit from the displacement of supply chains from Greater China into neighbouring ASEAN countries in the event of escalating US-China trade tensions. We roll over to CY19F and raise our GGM-based Target Price to S$32.00 (1.4x CY19 P/BV). Valuations are attractive; UOB trades below mean at 1.1x CY19F P/BV (ROE: 10.5%) with dividend yield of c.5%. See report: United Overseas Bank - Relatively Less Affected By Market Volatility.

Andrea CHOONG CGS-CIMB Research | LIM Siew Khee CGS-CIMB Research | https://research.itradecimb.com/ 2019-01-28
SGX Stock Analyst Report ADD UPGRADE HOLD 29.000 UP 27
ADD MAINTAIN ADD 32.000 UP 31.000