Banking – Singapore - UOB Kay Hian 2019-02-26: 4Q18 Round-Up ~ Hunker Down As External Environment Becomes More Uncertain

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

Banking – Singapore - 4Q18 Round-Up: Hunker Down As External Environment Becomes More Uncertain

  • 4Q18 results were affected by a drop in contribution from market-sensitive sources, eg wealth management, net trading income and gains from investment securities.
  • Banks maintained robust CET-1 CAR. OCBC and UOB increased dividends by 21.1% and 7.7% y-o-y to 23 cents/share and 70 cents/share respectively.
  • Maintain OVERWEIGHT. Prefer OCBC due to its potential to catch up on dividend payout.



WHAT’S NEW


Banks becoming yield plays due to generous dividends.

  • DBS maintained its final dividend at 60 cents/share. OCBC and UOB increased dividends by 21.1% and 7.7% y-o-y to 23 cents/share and 70 cents/share (final dividend: 50 cents, special dividend: 20 cents), respectively. OCBC has turned on its scrip dividend scheme with issue price for new shares at a discount of 10% despite having the highest CET-1 CAR at 14.0%.
  • For 2018, payout ratios of DBS, OCBC and UOB were 56%, 41% and 51% respectively. The three banks offer attractive dividend yield of 4.8%, 4.4% and 4.7% respectively.

Resiliency from strong capital adequacy.

  • OCBC’s CET-1 CAR has further improved by 0.4ppt q-o-q to 14.0%, catching up and surpassing DBS’ and UOB’s 13.9%. OCBC is currently the strongest in capital adequacy.
  • The three banks’ CET-1 CAR are significantly above MAS’ minimum requirement of 9%. Thus, their generous dividend policies are well supported by their strong capital position.

Chinese-owned banks recognised more NPLs.

  • We observed an uptick in NPL formation given the uncertain macro environment. OCBC and UOB saw NPL formation of 137bp (3Q18: 53bp) and 94bp (3Q18: 75bp). The two banks have also stepped up write-offs of 49bp (3Q18: 13bp) and 67bp (3Q18: 17bp). The two banks owned respectively by Lee and Wee families could have turned more conservative due to heightened uncertainties in the external macro and operating environment.

Further moderation in loan growth.

  • Banks have toned down their guidance for loan growth to mid single-digit for 2019 (compared with high single-digit for 2018), further highlighting their concern over deterioration in the operating environment.

Moderation in NIM expansion.

  • While recognising that the upside for interest rates is limited, banks have guided NIM expansion of 0-4bp in 2019 due to:
    1. lagged positive impact from interest rate hikes in 2H18, and
    2. more hikes in mortgage rates in 1Q19.

Still gunning for ROE of 12%.

  • DBS, OCBC and UOB have maintained guidance for credit costs at 25bp (stage 3 only), 12-15bp and 20-25bp, respectively. The three banks are still aiming for ROE of 12% in 2019.


ACTION


One step forward, two steps back.

  • The stock market is generally sanguine about prospects of trade agreement/ MOU between the US and China, the two largest economies in the world. However, other than trade conflict and geopolitical tension, there are other valid worries, such as slowdown in economic activities in Europe and China, and risks from hard Brexit.
  • The US political system is also becoming increasingly dysfunctional due to bipartisan acrimony.

Maintain OVERWEIGHT.

  • Our positive view on Singapore banks is justified by their attractive dividend yields, which differentiate them from their regional peers. With robust CET-1 CAR and the option to turn on scrip dividend, we see their payout ratios as sustainable.

We see OCBC narrowing the gap in dividend yield relative to peers.

  • OCBC has the highest CET-1 CAR of 14% and is continuing to work on improving its CET-1 CAR through implementing internal ratings-based approach (IRBA) for OCBC Wing Hang. Its payout ratio of 41% for 2018 is the lowest among the three Singapore banks.


SECTOR CATALYSTS

  • Banks evolving into yield plays. OCBC has more room to raise dividend payout ratio.
  • Trade deal between the US and China could provide a temporary truce. However, it will not remove simmering geopolitical tension and rivalry between the two super powers.


ASSUMPTION CHANGES

  • As per respective results notes.


RISKS

  • Slower economic growth in Europe and China. Bipartisan acrimony and political rivalry affecting government policies in the US. Risks from hard Brexit.





Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2019-02-26
SGX Stock Analyst Report BUY MAINTAIN BUY 13.85 SAME 13.85
BUY MAINTAIN BUY 28.400 SAME 28.400
NOT RATED MAINTAIN NOT RATED 99998.000 SAME 99998.000



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