Singapore Banks - Maybank Kim Eng 2019-02-11: 4Q18 What To Expect

DBS GROUP HOLDINGS LTD (SGX:D05) OVERSEA-CHINESE BANKING CORP (SGX:O39) UNITED OVERSEAS BANK LTD (SGX:U11)

Singapore Banks - 4Q18 What To Expect

DBS GROUP HOLDINGS LTD (SGX:D05) will be reporting 4Q18 results on 18 Feb, followed by UNITED OVERSEAS BANK LTD (SGX:U11) and OVERSEA-CHINESE BANKING CORP (SGX:O39) on 22 Feb.
As discussed in our recent report – Singapore Banks - Still Got The Juice dated 30 Jan, we expect slowing loan growth as the sector leaves the ‘growth’ phase of its cycle and enters ‘consolidation’. Nevertheless, we expect continued NIM expansion as asset yields are re-priced upwards amid falling y-o-y credit costs.
We will pay close attention to these as the banks report. A good showing here should support improving ROEs and robust dividends.
DBS and UOB are our top picks. Short-term pair trade: long DBS, short OCBC.

We estimate that adjusted sector NIMs expanded 13bps y-o-y in 2018E, led by DBS. Of our two top picks, UOB has lagged here, with average NIMs rising just 6bps in 9M18. But its momentum should pick up, from mortgage-yield repricing in 2H18 and pre-funding-costs wash-through.
UOB increased deposits by 8% between 4Q17 and 9M18 vs just 2% for DBS and OCBC. We will follow guidance on 2019 NIMs closely, particularly relating to funding-cost competition.

New NPA formation more than halved y-o-y in 9M18 as the sector recovered from stress in the offshore & marine segment. We expect a continuation in 4Q18.
That said, we believe slower loan and macroeconomic growth may raise risks to asset quality. Especially with pro-cyclical provisioning requirements under IFRS9 that typically result in accelerated provisioning when asset quality deteriorates, we will be watching for signs of any sector risks.

The sector has been investing heavily in technology, particularly in straight-through processing, data analytics etc. We will look for evidence on how these initiatives are supporting opex management.
Concurrently, we will observe how these investments are opening new revenue streams, especially as the banks move towards open banking platforms with increased collaboration among themselves, fintechs and the regulators.

Delivery of higher NIMs, tech-enabled opex management and benign asset quality should lift sector ROEs in this ‘consolidation’ phase. Gearing towards better NIMs and better dividend-yield visibility have rendered DBS (Target Price SGD30.18) and UOB (Target Price SGD30.50) our top picks.
Expectations of a divergence in dividend yields drive our short-term pair trade of going long on DBS and short on OCBC.

Thilan Wickramasinghe Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2019-02-11

SGX Stock Analyst Report BUY MAINTAIN BUY 30.180 SAME 30.180

BUY MAINTAIN BUY 10.950 SAME 10.950

BUY MAINTAIN BUY 30.500 SAME 30.500