DBS GROUP HOLDINGS LTD (SGX:D05)
UNITED OVERSEAS BANK LTD (SGX:U11)
Singapore Banks - Expecting A Better Quarter
- 1Q19 loan drawdowns likely to be strong and well supported, outpacing weaker industry loan numbers.
- Loan repricing provides support for NIM in 1Q19 amid limited SIBOR upside.
- Singapore still a bright spot as strong performance by Hong Kong in 2018 unlikely to be repeated for now.
- Expect some profit-taking leading up to May (ex-div date) bearing in mind strong base effect in 1Q18; UOB remains our preferred pick.
Weak 1Q19 GDP growth numbers likely priced in by markets.
- The advance GDP growth estimate of 1.3% y-o-y, down from 1.9% y-o-y in 4Q18, was the weakest quarterly growth since June 2009. However, we believe that the weak 1Q19 GDP growth numbers have been priced in by markets, with expectations that growth performance in the second half will be stronger.
Loan drawdowns at Singapore banks likely to be strong and well supported.
- Loan drawdowns at most Singapore banks is likely to be strong, following 4Q18’s momentum, where DBS GROUP HOLDINGS LTD (SGX:D05) / OVERSEA-CHINESE BANKING CORP (OCBC, SGX:O39) / UNITED OVERSEAS BANK LTD (UOB, SGX:U11) saw 1.3%/0.4%/2.6% loan growth q-o-q, which continues to be supported by drawdowns by developers in relation to the enbloc transactions, as well as other deal-related pipelines.
- While industry growth has been weak in the first few months of 2019, we believe that Singapore banks’ loans growth will continue to outpace the industry as in 2018 where loan growth was buoyed by strong growth in Singapore and the region. We expect full year loan growth for Singapore banks to come between 4-6%.
SIBOR likely to go sideways.
- In the recent April monetary policy statement, the Monetary Authority of Singapore (MAS) kept the monetary policy unchanged, although the forecast range for core inflation has been lowered. DBS Economists believe that the SGD policy stance is likely to be unchanged at its next review in October too as with the Fed on pause, there appears to be little urgency for the MAS to tighten again.
- As USD rates head sideways amid a muted global growth outlook and a Fed on pause, we would expect SGD rates to perform similarly. DBS Group Research forecasts 3MSIBOR to be at 1.95% through to 4Q19.
Some NIM improvement to look out for in 1Q19 results.
- Overall, we expect most Singapore banks to report some NIM improvement in their 1Q19 results amid higher cost of funds. We currently assume modest NIM expansion of c.2-5bps for FY19. We note that 3MSIBOR averaged 1.73% during 4Q18 (3Q18: 1.63%), and continued to trend up to 1.94% as of 17 Apr 2019. This translates into higher yields for loans in 1Q19, as it takes up to 90 days for a full re-pricing to take place.
- Given volatile movements in HIBOR, we believe that Hong Kong’s NIM may come in flattish. We continue to observe competition for deposits in Indonesia, Malaysia and Thailand which may weigh on regional NIM.
- For UOB, margins on corporate loans continue to be competitive as banks become more selective in lending to higher quality names.
Non-interest income to recover from lows of 4Q18.
- In 4Q18, Singapore banks’ non-interest income was weak due to lower wealth management income and net trading income, which were largely affected by market volatility as well as unrealised mark-to-market (MTM) losses. We expect non-interest income to recover from the lows of 4Q18 on the back of improving market sentiment which should see increased market activity from customers, as well as a recovery in MTM losses.
- While we see non-interest income recovering from the lows of 4Q18, we note that 1Q18’s record high wealth management income that was supported by strong buoyant market sentiment may not be repeated.
Singapore to drive Singapore banks’ growth vis-a-vis other regions.
- In FY18, DBS posted record earnings for Hong Kong as net interest income grew 30% y-o-y amid higher HIBOR, while OCBC Wing Hang benefitted from an increase in prime lending rate mitigated by higher costs of funds. Given HIBOR’s volatility in 1Q19, we believe that the strong performance contributed by Hong Kong in 2018 is unlikely to be repeated for now.
- Meanwhile, we believe that Indonesian and Malaysian markets are still awaiting more clarity on policies, which may be a drag on growth in the short term. With Hong Kong’s performance unlikely to be repeated, Singapore, which contributed c.54- 66% of PBT in FY18, is likely to be the main driver for Singapore banks’ growth in 1H2019 among other geographies, with
- more NIM upside compared to the likes of Hong Kong, Malaysia and Indonesia,
- bigger loan pipeline with several large infrastructure deals,
- recovery of non-interest income from 4Q18 lows.
- This comes against potentially weaker growth from Hong Kong, more cautious lending in Indonesia, Malaysia and Thailand awaiting more policy certainty.
Normalising credit costs; no systemic risk.
- Singapore banks continue to guide for normalising credit costs in FY19F from a low base in 2018 which saw abnormally low credit costs post the introduction of IFRS9 accounting rules. In the meantime, Singapore banks have not seen any concentrated deterioration of asset quality in any country or sectors.
- Recall that in 4Q18, the banks posted higher provisions with UOB recording higher non-performing assets (NPA) formation following strong loan growth, while OCBC’s spike in NPA formation was largely attributed to Coastal Oil (which has been fully provided for) as well as a corporate account which entered structuring (not anticipating any losses but downgraded to NPL).
Continuous drive in digital agenda while managing costs.
- Singapore banks continue to drive cost efficiencies by reining in costs against a moderating growth environment while balancing their digital agendas. We estimate cost-to-income ratios of banks to be c.42% to 44% in FY19F.
- In 1Q19, UOB launched its new mobile-only digital bank TMRW in Thailand, targeting mobile savvy millennials, which has seen over 10k downloads since launch.
Dividends and capital.
- Our base case remains that we do not see further upside for dividends in FY19F, with the exception of UOB which has a dividend payout ratio of c.50% (of net profit) subject to minimum CET1 ratio of 13.5% and sustainable business performance.
- Banks which have CET1-ratio above their comfort levels and are not looking to raise dividends may be on the lookout for selected acquisitions to complement their existing businesses.
Valuation and Recommendation
UOB our preferred pick; dividends continue to be attractive leading up to May (ex-div date).
- Since our last report on 2 Apr 2019: Singapore Banks - Undemanding Valuations, the banks’ share prices have gained c.5-7%, and are currently yielding between c.3.9-4.7%. See DBS share price, OCBC share price, UOB share price.
- The banks’ dividends will be going ex-div in May. In the meantime, we believe that the attractive dividend yields will continue to provide valuation support, though we expect some profit-taking closer to May.
- We continue to like UOB as a defensive pick for
- its attractive dividend yield of c. 4.7%,
- smaller exposure to China among the local banks and
- a more defensive wealth management franchise as UOB continues to navigate cautiously in a moderating growth environment.
Key risks
Inability to deliver NIM uplift.
- Expectations have been toned down with respect to NIM uplift for the Singapore banks, though we believe market is still looking at marginal NIM expansion in FY19F. Faster increase in cost of funds over loan yields could upset NIM uplift trends.
Asset quality trend reversal.
- It is largely expected that oil and gas related provisions and NPLs have been dealt with. A larger-than-expected NPL arising from oil and gas sector, or generic sectors could indicate risks of a faster-than-expected slowing economy, and unwind expectations of credit cost and NPL declines, thus posing risks to earnings.
Slower-than-expected loan growth.
- A breakdown in US-China trade talks, disappointing macro indicators and a less firm macroeconomic outlook going forward could temper our loan growth expectations, though we argue that several large infrastructure projects in the pipeline would provide support for loan growth.
- Although loan growth is less sensitive to earnings, any loan deceleration as a result of weaker sentiment would dent topline prospects. A sharp slowdown in the Singapore property market will also derail property-related loan growth.
Rui Wen LIM
DBS Group Research
|
https://www.dbsvickers.com/
2019-04-22
SGX Stock
Analyst Report
99998.000
SAME
99998.000
29.200
SAME
29.200
