Banks - CGS-CIMB Research 2019-03-21: Banking On More Patience

Banks - CGS-CIMB Research | SGinvestors.io DBS GROUP HOLDINGS LTD (SGX:D05) UNITED OVERSEAS BANK LTD (SGX:U11) OVERSEA-CHINESE BANKING CORP (SGX:O39)

Banks - Banking On More Patience

  • Fed rates left unchanged at 2.25-2.5% amid lowered GDP, inflation and unemployment estimates. The Fed projects zero hikes in 2019 and 1 in 2020.
  • Singapore banks’ NIMs should still see upside in 2019. Average 3MSIBOR rose to 1.92% in 3M19 while mortgage board rates have repriced upwards.
  • Maintain Overweight. We think the pause in rate hikes has been priced into valuations, although a rate cut could be a key de-rating catalyst.



Pause in Fed rate hikes could be priced into valuations

  • The Federal Open Market Committee (FOMC) left policy rates unchanged at this month’s meeting – the first pause in successive hikes since Dec 2017.
  • Concerns on weaker economic gains (lower GDP growth estimate of 2.1% from 2.3% in Dec 2018) and benign inflation (reduced 0.1%pt to 1.8%) as well as a higher unemployment rate (increased 0.2%pt to 3.7%) formed the Fed’s case to hold out for a pause in any further rate hike until 2020. The caveat for any change in policy would depend on key economic data such as wage growth and inflation. We believe sector valuations have priced in the advent of a patient pause in rate hikes.
  • We think that current circumstances (stable asset quality amid slower regional growth) do not warrant a significant retracement in valuations.


Rise in average 3MSIBOR to 1.92% provides support for NIMs

  • We continue to expect NIM upside from a rise in interbank rates and the delayed effects of the ongoing repricing of mortgage board rates. Average 3MSIBOR increased to 1.92% in 3M19 (from 1.73% in 4Q18) – the strongest rise seen since 2Q18.
  • The reversion of 3MHIBOR onto an upwards trend (after having steeply declined in Dec 2018 to Feb 2019) should also contribute positively to NIMs. While a portion of the increase in mortgage board rates are concurrent with an increase in fixed deposit (FD) rates offered, the impact from the rise in funding costs should be relatively contained given Singapore banks’ high CASA proportion. Although industry FD rates remain elevated at c.2% (for 12-month placements), the higher end of the rates were mainly offered by foreign banks with smaller customer deposit bases.
  • We project a 2-5bp NIM expansion across the banks, with DBS being the best-placed given its stronger funding cost shield.

Maintain Overweight; sector valuations still attractive below mean

  • Contrary to the Fed’s projections of rates being unchanged in 2019, the Fed funds futures, being more reactive to market sentiments, raise the possibility of a rate cut by end-2019. This could be a key de-rating catalyst, although we opine that a rate cut may not translate into immediate margin compression as the banks ride on longer-dated loans while reining in funding costs, which typically react more quickly to a change in interbank rates.
  • Sector valuations are still attractive below long-term mean of 1.3x CY19F P/BV. CET-1 ratio of c.14% across the banks continue to provide visibility to dividend yields.
  • Our order of preference is DBS, UOB and OCBC.


Highlighted Companies


DBS GROUP HOLDINGS LTD (SGX:D05)

  • Rating: ADD, Target Price: S$29.00.
  • Typically seen as the best play on interest rate hikes, DBS also has the strongest funding cost shield given its 59% CASA ratio. We see continued NIM upside from the rise in both 3MSIBOR and 3MHIBOR.

OVERSEA-CHINESE BANKING CORP (OCBC, SGX:O39)

  • Rating: HOLD, Target Price: S$12.00.
  • OCBC bore the brunt of hefty interest expenses through 2018 as it sought to shore up its funding base ahead of escalating funding costs. NIM upside should come from lagged mortgage repricing.

UNITED OVERSEAS BANK LTD (UOB, SGX:U11)

  • Rating: ADD, Target Price: S$29.00.
  • We think that UOB is well-placed to benefit from a displacement in supply chains in the event of escalating trade tensions. NIM expansion should follow





Andrea CHOONG CGS-CIMB Research | LIM Siew Khee CGS-CIMB Research | https://research.itradecimb.com/ 2019-03-21
SGX Stock Analyst Report ADD MAINTAIN ADD 29.000 SAME 29.000
ADD MAINTAIN ADD 29.000 SAME 29.000
HOLD MAINTAIN HOLD 12.000 SAME 12.000



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