Singapore Banks - DBS Research 2019-04-02: Undemanding Valuations

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

Singapore Banks - Undemanding Valuations

Increase in mortgage rates continues to be bright spot for banks amid higher cost of funds.
Keep watch on trade deal outcome as loan growth remains tepid.
Entering a moderating growth environment.
Valuations of c.1.1x FY19F P/BV are undemanding amid strong capital levels; continues to be supported by dividend yield of c.4.1-4.7%.

UNITED OVERSEAS BANK LTD (UOB, SGX:U11) will benefit from hikes in mortgage rates based off fixed rates in 1Q19 where UOB was the first in 2019 among the three local banks to raise its SGD fixed deposit rates during February. According to UOB, mortgages based on fixed deposit rates may see hikes up to 70bps.
In December 2018, OVERSEA-CHINESE BANKING CORP (OCBC, SGX:O39) also announced average hikes of 55bps across the board with effect from January 2019. In March 2019, DBS GROUP HOLDINGS LTD (SGX:D05) announced increases in fixed deposit home rates with effect from April 2019 of up to 40bps.
Meanwhile, ongoing loans repricing for non-corporate loans also continues as repricing typically lags movements in SIBOR. We estimate that c.40% to 45% of the banks’ SGD loan book are based off SIBOR/SOR.

While loan drawdown has been slow since the start of the year, clarity from possible trade deal may spur more loans drawdown or gradual recovery in trade loans against a clearer and more certain macroeconomic backdrop.

DBS Group Research forecasts Singapore GDP growth to be c.2.8-3.0% through FY20F.
We believe that Singapore banks’ earnings should see mid-single digit growth, buoyed by continued NIM expansion through FY19F on further loans repricing, though loan growth is expected to moderate to c.4-6%, hinging on non-trade corporate loans and regional loan demand.

We believe that current valuations of c.1.1x FY19F P/BV remain undemanding amid the slower macroeconomic growth environment, barring any risks to the banks’ asset quality.
Singapore banks remain as decent dividend yield play amid strong capital levels, benign asset quality with mid-single digit earnings growth and will likely trade rangebound up till ex-div dates. In the meantime, we continue to keep watch on developments in oil and gas provisions.

Impact through to NIM in FY19F largely priced in. The Fed slashed its rate hike forecast to zero this year with just one hike from now till end-2021, citing slower growth, tame inflation and uptick in unemployment rate going forward.
We currently assume modest NIM expansion of c.2-5bps for FY19, which remains unchanged following the pause in fed rate hikes, as we believe slowing NIM expansion is largely priced in. There could be downside risk to NIM expansion in FY20F following the rate hike pause.

Probability of a recession/slowdown as 3M/10Y yield curve inverts over the next 12 months may be overstated. Yield curve inversion has occurred in some tenors and has spread to the more widely watched 3M/10Y. Typically, an inverted yield curve foreshadows a recession in the next 6-20 months based on data through to early 1980s.
Interestingly, the 2Y/10Y (another closely watched metric) is not inverted but this is largely due to the market already pricing in easing over the coming two years.
Typically, an inverted yield curve foreshadows a recession in the next 6-23 months based on data through to early 1980s. In 2000, the market correction started almost immediately following the inversion of the yield curve, whereas in 2005, the market correction started after more than 20 months. Our economists believe that we are leaning towards a slowdown, rather than a recession in the US.

De-rating will come when asset quality and/or recession fears heighten. Through the years, Singapore banks have built up its book value substantially. We posit that de-rating of banks’ valuations below its book value will come when asset quality and/or recession fears heighten as concerns over book value loom, as observed in previous cycles, amid mark down of values of collaterals and investments and rising bad debt due to borrowers’ inability to repay loans.
OCBC did a one-off adjustment in its credit costs in 4Q18 and we continue to keep watch for further developments in posible one-off oil and gas-related provisions and believe that the general credit environment remains benign. We continue to keep watch on any possible signs of a deteriorating credit environment.

Rui Wen LIM DBS Group Research | https://www.dbsvickers.com/ 2019-04-02

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BUY MAINTAIN BUY 29.200 SAME 29.200