Singapore Banks - RHB Invest 2019-02-26: More Room For NIM Expansion

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DBS GROUP HOLDINGS LTD (SGX:D05) UNITED OVERSEAS BANK LTD (SGX:U11)

Singapore Banks - More Room For NIM Expansion

• Keep OVERWEIGHT on banking sector. Singapore banks should record further NIM expansion in 2019 – which will come from higher lending yields. In addition, over the longer term, we expect more cost efficiencies from digitisation efforts. All these will contribute to ROE expansion.
• Dividend yields are also attractive.We have BUY recommendations on both UOB and DBS.
• UOB is our preferred pick, partly due to its lower P/BV valuation.

1Q18 results were in line with expectations.

• Singapore banks’ 4Q18 earnings were generally in line with expectations. There was continued sequential expansion in NII as loans expanded, although the sequential NIM trend was mix.
• However, non-II performed poorly on weaker trading income and lower fees and commissions.

Higher lending yields ahead.

• The 3-month SIBOR is now at 1.94%, higher than 4Q18’s average of 1.73%. Repricing of loans will raise lending yields and contribute to wider 2019 NIM.
• DBS GROUP HOLDINGS LTD (SGX:D05) has guided for 4-5bps NIM expansion in 2019, assuming no further US Fed Fund Rate (FFR) hikes.
• UNITED OVERSEAS BANK LTD (SGX:U11, UOB) guided for flat 2019 NIM with an upward bias, and highlighted that home mortgage repricing will raise lending yields.

Mid-single-digit 2019 loan expansion.

• Singapore banks’ management teams are guiding for mid-single-digit 2019 loan growth, slower than the high-single-digit growth rates in 2018. After the Jul 2018 property cooling measures, home mortgages slowed in 4Q18, and are expected to remain soft in 2019.

Cost income ratio (CIR) to trend down over the longer term.

• DBS guided for 2019 CIR of 43%, down from 2018’s 44%.
• UOB guided for 2019 CIR to be similar to 2018’s 43.9%. The digitisation efforts should contribute to lower CIR over the longer term.

Dividend payout to remain high.

• Capital adequacy ratios (CAR) are at similar levels. DBS and UOB recorded CET1 CAR of 13.9%, whilst OVERSEA-CHINESE BANKING CORP (SGX:O39, OCBC)’s was at 14%.
• UOB guided for a dividend payout ratio of 50% subject to CET1 CAR of at least 13.5% and good financials. Therefore, we believe dividends should expand for UOB. DBS should also report good dividends given its high CET1 CAR.

UOB is our preference.

• Within the OVERWEIGHT banking sector, we believe UOB has the best potential for share price upside. Its 15% loan percentage exposure to Greater China, which is half of DBS’, puts UOB less susceptible to China’s economic uncertainties.
• UOB offers an attractive 2019 dividend yield of 5.1%, and trades at 1.15x 2019 book, below its historical average of 1.25x. Our SGD29.80 Target Price is based on 1.35x 2019 book.

DBS is also attractive.

• Amongst the banks, DBS’ earnings will gain most from FFR hikes, as evident from its 2018 NIM widening more than its peers. The lagged effect from FFR hikes on DBS’ NIM should feature prominently in its 2019 results, and management has guided for 4-5bps NIM expansion in 2019.
• Our SGD28.80 Target Price is based on 1.5x 2019 book.

Leng Seng Choon CFA RHB Securities Research | https://www.rhbinvest.com.sg/ 2019-02-26

SGX Stock Analyst Report BUY MAINTAIN BUY 28.800 SAME 28.800

BUY MAINTAIN BUY 29.800 SAME 29.800