DBS GROUP HOLDINGS LTD (SGX:D05)
UNITED OVERSEAS BANK LTD (SGX:U11)
OVERSEA-CHINESE BANKING CORP (SGX:O39)
DBS OCBC UOB - 1Q19F Preview: A Market-Driven Rebound
- 3 trends in SG bank sector:
- funding pressure less intense q-o-q,
- 10- 50 bp mortgage repricing since Jan 2019,
- M&As supporting loan growth.
- Trading and wealth management income likely rebounded (10-36%) towards the levels seen in 2Q18/3Q18, particularly for DBS and OCBC.
- We estimate UOB achieved the highest y-o-y income growth (+6.7%), DBS led in NIM expansion (+2bp) and OCBC’s trading income rebounded strongly.
Common themes observed in 1Q19
#1: Funding pressures less intense
- Singapore banks should find funding pressures somewhat alleviated with the lifting of interest rate hike risks in FY19 as per the Fed’s current projections. While still elevated, we observed that the increase in fixed deposit rates in 1Q19 was relatively contained as compared to that in 4Q18.
- Aside from the time lag taken for assets to reprice onto higher rates, recall that margin expansion in FY18 had been capped by banks’ tactical strategies to build up their funding bases in anticipation of escalating costs. We believe that the peak of these pressures has passed, and believe there was some stabilisation in funding costs in 1Q19.
- Mortgage repricing aside, we think that further NIM expansion in FY19 is likely to hinge on each bank’s play on emphasising different target segments (corporate, SME, retail) and their individual pricing power.
#2: More mortgage repricing took place in Jan-Mar 19
- We believe that most of the NIM expansion in 1H19 should be driven by the repricing of mortgage board rates towards (higher) SIBOR-pegged rates. In contrast with floating-rate loans, mortgage board rates are more discretionary and typically lag the movement of interbank rates.
- Mortgage board rates across DBS GROUP HOLDINGS LTD (SGX:D05), OVERSEA-CHINESE BANKING CORP (OCBC, SGX:O39) and UNITED OVERSEAS BANK LTD (UOB, SGX:U11) were raised by 10-50bp in Dec 2018 - Jan 2019, with subsequent repricing exercises taking place up until Mar. We understand that almost all of the banks’ mortgage portfolios pegged to board rates would successfully be repriced come 2Q19. The NIM increase stemming from these actions should be spread over 1H19, with a heavier bias towards 2Q19.
- The still-uncertain macro environment makes the case for banks to lean towards higher quality credit (especially in the context of corporate loans) although these exposures fetch leaner margins. A further boost to NIMs beyond asset repricing could come from a switch towards higher-yielding segments such as SMEs.
#3: M&A buzz to help loan growth
- Against the tepid growth in consumer financing segments, we believe that corporate loan expansion driven by M&A-type deals could push loan growth above the banks’ expectations of up to mid-single digit growth in FY19. Among the recently announced/completed deals in the market are CAPITALAND LIMITED (SGX:C31)’s acquisition of Ascendas-Singbridge (deal valued at S$11bn), KEPPEL CORPORATION LIMITED (SGX:BN4) and SINGAPORE PRESS HOLDINGS (SPH, SGX:T39)’s buyout of telco M1 LIMITED (SGX:B2F), and the merger of OUE COMMERCIAL REIT (SGX:TS0U) and OUE HOSPITALITY TRUST (SGX:SK7) (deal valued at S$1.5bn). Fee income from facilitating these deals would be an added advantage for earnings growth.
- The sale and purchase of assets, such as OXLEY HOLDINGS LIMITED (SGX:5UX)’s divestment of Chevron House and SPH’s acquisition of student accommodation assets in the UK, further support the possibility of stronger-than-expected loan growth across the banks in FY19.
- Notably, DBS and UOB have guided for mid-single digit loan growth in FY19, while OCBC sets its expectations for low-to-mid single digit growth.
Earnings Expectations
DBS GROUP HOLDINGS LTD (SGX:D05); 1Q19 results on 29 Apr 2019
- We expect DBS to report a net profit of S$1.45bn in 1Q19 (+9.8% q-o-q, -4.8% y-o-y). As with the trends seen in the industry, mortgage growth is likely to be muted this quarter. We understand that non-trade corporate loan growth has been healthy and is likely to be deal-driven.
- Trade loan growth remained uninspiring as pricing stayed unattractive. We forecast DBS’s loan base to expand +1.3% in 1Q19. With funding costs having run up in tandem with the Fed rate hikes over FY18, DBS has been actively repricing its mortgage board rates towards the higher SIBOR-pegged rates.
- We understand that the bank had hiked board rates by about c.50bp in 1Q19. The bank guides that this repricing exercise should be completed with the one done in Mar – we think that most of the impact on NIM should come through in 2Q19.
- We expect DBS’s NIMs to expand +2bp to 1.89% in 1Q19. A recovery in capital markets should result in an improvement in market-related income lines such as trading income and wealth management. ROE improvement to 12.5% (assuming no Fed rate hikes) remains intact pending NIM expansion of +5bp in FY19.
OVERSEA-CHINESE BANKING CORP (OCBC, SGX:O39); 1Q19 results on 10 May 2019
- We expect OCBC to post a net profit of S$1.13bn in 1Q19 (+22.2% q-o-q, +1.8% y-o-y). OCBC’s loan growth trend could be similar to that seen in the general banking system, given slowing regional growth and muted mortgage demand on the back of the property cooling measures. Nonetheless, higher mortgage board rates are likely to support OCBC’s expectations of up to 5bp in NIM growth for FY19.
- We understand that the bank has been focusing on expanding its SME portfolio in the Greater Bay Area (vs. mortgages) – this would provide margin upside, although greater supervision of the credit quality of these exposures might be required.
- We pen in loan growth of +1.2% in 1Q19, as well as NIM expansion of +1bp to 1.73%. Insurance, wealth and trading income could be the key earnings driver for OCBC given the rebound in markets in 1Q19.
- We do not expect negative credit cost surprises in 1Q19 given the recent revision in O&G collateral values done in 4Q18. A positive re-rating could be on the cards pending clarity on the bank’s capital management plans. We believe that there is capacity for a higher dividend payout in FY19 given the bank’s strong 14.0% CET-1 ratio.
UNITED OVERSEAS BANK LTD (UOB, SGX:U11); 1Q19 results on 3 May 2019
- We forecast UOB’s net income to come in at S$1.04bn in 1Q19 (+13.8% q-o-q, +6.7% y-o-y). Loan growth could be a strong point for UOB in 1Q19 as a second (and likely final) portion of previously delayed loan commitments (recall 3Q18) get drawn down – we understand that most of these were property-related loans.
- We expect UOB to record +2.3% loan growth in 1Q19. The bank’s guidance for full-year NIM expansion is for it to be stable, with potential upside. Similar to peers, UOB had repriced its mortgage board rate loans by up to +50bp in some cases.
- Margins of its regional operations could be flattish as a result of the uncertain political landscape and the general cautious sentiment of the bank. Despite the potentially strong growth, we think that UOB’s NIMs could increase just +1bp to 1.81% in 1Q19 as corporate loans are generally low-yielding.
- Credit costs should stay benign in 1Q19, in line with the bank’s 20-25bp guidance for FY19. We believe that UOB’s earnings generation is supportive of reaching its 1.9% return on risk-weighted assets (RORWA) target.
Valuation & Recommendation
- With the STI gaining 4.7% in 1Q19, we think that OCBC could be the front runner in earnings growth this quarter. We think that a rebound in market-related income is likely for all three banks, and particularly for OCBC as we expect an absence of MTM losses from shareholders’ funds from its insurance arm in 1Q19.
- Weak NIM growth will be a recurring theme across all banks in FY19, but we think that DBS should have an edge over its peers given its robust CASA franchise. Business volumes of the banks’ regional operations could be the key to banks’ performance this year.
- We think the slowing growth of China could benefit its surrounding ASEAN peers – UOB has the largest exposure to ASEAN amongst the Singapore banks.
- DBS’s valuations have run up to 1.5x CY19F P/BV (ROE: 12%) – relatively expensive compared to its 1.2x long-term mean. OCBC trades below its mean at 1.2x CY19F P/BV (ROE: 10%) – we believe this to be an attractive point of entry. We think that OCBC could see a re-rating if stronger market-related income comes through and if the bank provides clarity on its dividend policy.
- Preference maintained as DBS, UOB then OCBC.
Andrea CHOONG
CGS-CIMB Research
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LIM Siew Khee
CGS-CIMB Research
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https://research.itradecimb.com/
2019-04-23
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