Singapore Banks - DBS Research 2019-01-25: An Eventful Start To The Year


Singapore Banks - An Eventful Start To The Year

  • Singapore banks’ share prices gained c.2-5% since start of the year; dividend yield provides valuation support to share prices.
  • Fed turned more dovish after the last rate hike in December; slower/less rate hikes a downside risk.
  • Ongoing loans repricing as 3MSIBOR continues to trend up; competition for SGD fixed deposits heats up.
  • 4Q18 results likely to continue seeing divergence in loan growth and NIM trends, amidst softer wealth management and trading income.

Whats' New

Ongoing pricing up of loans.

  • With average 3MSIBOR seeing a c.22bps rise from 2Q18 to 3Q18, we expect to see a continuous uplift in loan yields through 4Q18 and going into 1Q19.
  • Notably, channel checks have also showed that Singapore banks have continued to increase the pricing for new mortgages, as well as existing mortgages. For instance, since August 2018, we gather Singapore banks’ fixed home mortgages (two-year and three-year across respective banks) have increased c.50-70bps.

Latest monthly loan growth data in Singapore remains tepid, though Singapore banks largely grew faster than industry during 3Q18.

  • From Dec 2017 to Sep 2018, industry loan growth (DBU+ACU) grew by c.7.8% y-o-y compared to Singapore banks’ loan growth of c.8-10% y-o-y, in part due to regional loans growth.
  • As mortgages’ loan growth continues to slow down with the advent of the property cooling measures, we believe that committed property developments (new developments and enbloc developments alike) remain in the pipeline of Singapore banks’ through at least 1H2019. New mortgages committed will also continue to see progressive drawdown towards completion of development.
  • Infrastructure projects such as construction of Terminal 5 at Changi Airport could add to the upcoming loan pipeline into FY2020. We posit loan growth to moderate to c.6% going into FY2019.

Competition in SGD fixed deposits space continues.

  • Competition has intensified among local and foreign banks alike, with some banks now paying more than 2% for a 6-month fixed deposit.
  • As banks continue to weave in liquidity buffers from time to time, amid competition for SGD fixed deposits among the foreign banks in part due to NSFR (net stable funding ratio) requirements, Singapore banks may also have to pay up for SGD deposits to maintain their presences in the market.

Path to NIM expansion not as straightforward as expected.

  • Recall that OVERSEA-CHINESE BANKING CORP (SGX:O39, OCBC) had flattish NIM trend for five quarters up to 3Q18 in part due to excess USD liquidity amassed in 2H17. In 3Q18, OCBC posted a 5bps improvement q-o-q where it started to reprice its loan book as it released excess USD liquidity amassed in 2H17.
  • On the other hand, UNITED OVERSEAS BANK LTD (SGX:U11, UOB) saw a 2bps decline in NIM in 3Q18 as it took an active decision to build up its SGD deposits during 3Q18 in anticipation of more competition towards year end. Going forward, Singapore banks might see cost of funds spike up in certain quarters where, for instance, tactical funding decisions are made.
  • Across the region, we continue to see funding pressure across Indonesia and Thailand, and to a smaller extent Malaysia and Hong Kong. We believe that putting aside q-o-q movements, directionally, the increase in loan yields should outpace the rise in cost of funds and we have modelled in modest NIM expansion of c.6 bps through 2019. However, a further rise in cost of deposits exceeding our expectations may derail our thesis.

Weaker markets environment likely to affect wealth management and trading income going forward.

  • The end of 4Q18 saw volatile markets, narrowing of yield spreads, mild inversion of the shorter end of the treasury curve amid market jitters over the trade truce and the Fed hike trajectory in December. We believe the tough trading environment and risk-off sentiment are likely to weigh on wealth management and trading income across the banks, particularly on a higher base effect into 1Q19.
  • Notably, UOB’s renewed bancassurance arrangement with Prudential will see fees of S$1.15bn paid to UOB over 15 years starting 2020, providing a boost to UOB’s fee income.

Oil and gas woes likely to be one-off; higher credit costs in 2019 expected.

  • In early January, it was reported that Coastal Oil Singapore, a client to the Singapore banks filed for liquidation with an outstanding debt to the three Singapore banks of c.US$172m. We believe this is likely a one-off case and is unlike the bulk of oil and gas woes which affected offshore marine firms.
  • The oil and gas episode has been dealt with through huge provisions and NPLs taken through 2016 to 2017. However, credit costs in 2019 are likely to trend higher from a low base in 2018 which saw abnormally low credit costs post the introduction of IFRS9 accounting rules.
  • In the meantime, Singapore banks have not seen any concentrated deterioration of asset quality in any countries nor sectors. We continue to keep a watch on the SME loan book that might reveal early signals of a slowing economy.

Singapore banks continue to drive cost efficiencies.

  • We believe that Singapore banks will continue to drive cost efficiencies as they continue to invest in technologies and digital capabilities, with cost-to-income ratio of c.42% to 44% in FY19F.

Dividend support and potential upside to dividends.

  • Singapore banks have revised their dividend policies in view of their existing strong capital positions. We believe that high dividend yields for Singapore banks continue to provide valuation support in the meantime.
  • We believe that UOB could be paying more dividends in 2H18 compared to 1H18, with its new dividend payout ratio of c.50% (of net profit) subject to the minimum CET1 ratio of 13.5% and sustainable business performance.
  • OCBC’s dividend payout ratio of c.37% have lagged peers’ and with a more comfortable CET1 ratio of c.13.6% post its scrip dividend scheme, we believe that there could be a case for OCBC to nudge up its dividend payout levels. OCBC Wing Hang will also be undergoing risk-weighted assets internal ratings-based approach implementation in end-2019 to early 2020. The exercise, subject to regulatory approvals by HKMA and MAS, might strengthen OCBC’s CET1 ratios, which is one of the metrics OCBC looks at in determining its dividend policy.

Valuation and Recommendation

Prefer UOB to OCBC.

  • Although we have BUY ratings on both UOB (Target Price S$29.50) and OCBC (Target Price S$13.20).
  • We prefer UOB for the following reasons:
    1. higher dividend yield versus OCBC,
    2. strong capital position; building up its liquidity buffers as it continues to grow loan book and NIM, and
    3. UOB is a defensive pick as it has a smaller exposure to China among the local banks and a more defensive wealth management franchise.
  • Our BUY rating on OCBC is premised on:
    1. ongoing NIM expansion on full impact of loan repricing,
    2. stronger capital position post scrip dividend issue (now in line with peers), and
    3. higher dividends could be a share price catalyst.

Key risks

Inability to deliver NIM uplift.

  • Expectations are rife that the Singapore banks will deliver strong NIM trends following sequential Fed rate hikes. Slower-than-expected SIBOR/SOR pass-through or faster increase in cost of funds over loan yields could upset NIM uplift trends.

Asset quality trend reversal.

  • Banks are already on a recovery trend for their NPLs. A larger-than-expected NPL occurrence could unwind expectations of credit cost and NPL declines, thus posing risks to earnings.

Slower-than-expected loan growth.

  • A fall-through in US-China trade talks, disappointing macro indicators and a less firm macroeconomic outlook going forward could temper our loan growth expectations. Although loan growth is less sensitive to earnings, any loan deceleration as a result of weaker sentiment would dent topline prospects.
  • A sharp slowdown in the Singapore property market will also derail property-related loan growth.

Sue Lin LIM DBS Group Research | https://www.dbsvickers.com/ 2019-01-25
SGX Stock Analyst Report BUY MAINTAIN BUY 13.200 SAME 13.200