DBS GROUP HOLDINGS LTD (SGX:D05)
OVERSEA-CHINESE BANKING CORP (SGX:O39)
UNITED OVERSEAS BANK LTD (SGX:U11)
Singapore Banks - Marketing Feedback From Across The Causeway
Malaysian clients looking to SG banks for yield, quality
- We met 15 Malaysian investors last week from a mix of long-only, hedge and private-banking funds to discuss Singapore banks and our stock calls:
- DBS GROUP HOLDINGS LTD (SGX:D05) (BUY, Target Price: SGD29.56),
- UNITED OVERSEAS BANK LTD (SGX:U11) (BUY, Target Price: SGD29.71) &
- OVERSEA-CHINESE BANKING CORP (SGX:O39) (HOLD, Target Price: SGD10.73).
- They were cautious on regional macros given an unresolved US-China trade war, election uncertainties in Southeast Asia and slower economic growth. There was significant interest in Singapore banks from a flight-to-quality angle and for their high dividend yields as the SGD is appreciating.
- There was very little push-back on our top picks, DBS & UOB.
- Key sector concerns were over asset quality, rising funding costs and the long-term impact of technology & fintech platforms.
Will slower growth affect asset quality?
- There were concerns that credit charges might spike given regional economic volatility. But 2018 saw the lowest sector credit charges in 12 years and we have yet to see any sector distress YTD. MKE Economics still forecasts economic growth for the region. As a result, we think NPLs are likely to remain contained.
- For prudence, we forecast a 5bp rise in credit charges by 2020E. This is because although strong regulatory capital ratios should provide additional downside protection, the known unknown is the impact of IFRS9, which will require pro-cyclical provisioning.
- We think any major asset-quality distress may result in higher-than-expected credit charges. This needs to be closely watched.
How can NIMs expand given rising funding costs?
- NIM sustainability was another concern, given:
- a more-than-100% system LDR;
- rising interest rates; and
- liquidity competition from Singapore Savings Bonds.
- While higher rates will erode CASA in favour of fixed deposits, domestic banks still hold around 50% of low-cost deposits in their mix. Concurrently, they are pricing up their loan books, particularly for board-rate-linked mortgages. This should support a 5-6bp NIM expansion for the sector, despite a 76bp increase in our funding-cost assumptions for 2019E vs +35bps in 2018.
- We also expect loan growth of 6% y-o-y, underpinned by growth in regional markets where 60% of Singapore bank loans now originate.
Can banks structurally compete with fintechs?
- The sector is taking a collaborative approach to fintechs. Given their entrenched position, the domestic banks have stronger networks and client depths that we reckon fintechs will find hard to replicate. At the same time, the sector can benefit from the faster innovation cycle that fintechs offer. Recent partnerships such as DBS-GOJEK and UOB-Grab confirm this trend.
- Given higher IT spending by the sector to streamline systems, it is unlikely that cost-to-income ratios will fall in the medium term. But we expect this trend to reverse when tech-related savings and new revenue begin to flow through in the long term.
Thilan Wickramasinghe
Maybank Kim Eng Research
|
https://www.maybank-ke.com.sg/
2019-03-15
SGX Stock
Analyst Report
29.560
SAME
29.560
10.730
SAME
10.730
29.710
SAME
29.710
