Banking – Singapore - UOB Kay Hian 2019-05-14: 1Q19 Round-Up ~ Strong Start; Earnings Up 8-11% Yoy Despite High Base

Banking – Singapore - UOB Kay Hian Research | SGinvestors.io DBS GROUP HOLDINGS LTD (SGX:D05) OVERSEA-CHINESE BANKING CORP (SGX:O39) UNITED OVERSEAS BANK LTD (SGX:U11)

Banking – Singapore - 1Q19 Round-Up: Strong Start; Earnings Up 8-11% Yoy Despite High Base

  • 2019 got off to a strong start with banks reporting earnings growth of 8-11% y-o-y despite the high base in 1Q18. Hikes in mortgage rates helped DBS and OCBC achieve NIM expansion of 1bp (underlying: 5bp) and 4bp q-o-q respectively.
  • Banks benefitted from strong net trading income. Asset quality remains stable, while CET-1 CARs were resilient at about 14%.
  • Maintain OVERWEIGHT. BUY DBS and OCBC.



WHAT’S NEW


DBS and OCBC maintained NIM expansion.

  • DBS and OCBC achieved NIM expansion of 1bp and 4bp q-o-q to 1.88% and 1.76% respectively, benefitting from recent hikes in mortgage rates and re-pricing of S$-denominated corporate loans. DBS explained that underlying NIM would have expanded 5bp q-o-q (instead of 1bp q-o-q), if we exclude the impact from treasury market activities.
  • On the contrary, UOB’s NIM narrowed 1bp q-o-q to 1.79%. UOB’s cost of deposits increased by a higher 11bp q-o-q in 1Q19, compared to 7bp q-o-q for DBS and 8bp q-o-q for OCBC.
  • On a y-o-y basis, DBS' and OCBC's NIM were up 5bp and 9bp respectively.

Wealth management fees still lower on a yoy basis.

  • DBS, OCBC and UOB saw wealth management fees rebound 44%, 15% and 19% q-o-q respectively due to the recovery in market sentiment and market activities. However, they were still 5%, 13% and 17% lower on a y-o-y basis due to high base in 1Q18.
  • DBS registered the strongest rebound in wealth management fees.

Strong trading income across the board.

  • DBS, OCBC and UOB registered robust net trading income of S$443m (+20% y-o-y), S$285m (+205% y-o-y) and S$243m (+39% y-o-y). The dramatic increase in OCBC’s net trading income was due to mark-to-market losses from shareholders’ fund suffered by Great Eastern (SGX:G07) in 4Q18, which affected OCBC’s net trading income, which reversed into gains in 1Q19.

Asset quality stable.

  • NPL formation has receded on a sequential basis. NPL ratio was stable at a similar 1.49% for DBS and 1.50% for OCBC and UOB.
  • We observed slight decline in NPL balance for trade-related sectors (manufacturing and general commerce) for DBS and OCBC. OCBC incurred hefty credit costs of 39bp as it reduced collateral valuations due to structural changes and the prolonged downturn in the oil & gas sector.

Resiliency from strong capital adequacy.

  • OCBC’s CET-1 CAR further improved by 0.2ppt q-o-q to 14.2%, catching up with and surpassing DBS’s 14.1% and UOB’s 13.9%. OCBC is currently the strongest in capital adequacy.
  • The three banks’ CET-1 CARs were significantly above MAS’ minimum requirement of 9%.


ACTION


The tricky business of trade negotiation.

  • The market was disappointed by the US’s move to raise tariff on US$200b worth of imports from China from 10% to 25%. However, trade negotiations are continuing and China has, thus far, not retaliated by imposing their own tariff. We stay vigilant in monitoring the progress of the trade negotiations. However, they are expected to last for a prolonged period of time.
  • In the meantime, businesses have to adapt and adjust. They will formulate contingency plans and counter-measures.

Maintain OVERWEIGHT.

  • Our positive view on Singapore banks rest on their attractive dividend yields, which differentiate them from their regional peers. We see their payout ratios as sustainable due to robust CET-1 CAR and the option to turn on scrip dividend.
  • See


SECTOR CATALYSTS

  • Banks evolving into yield plays. OCBC has more room to raise dividend payout ratio.
  • Banks benefitting from single-digit loan growth, gradual NIM expansion and stable asset quality.


ASSUMPTION CHANGES

  • As per results notes.


RISKS

  • Slower economic growth in Europe and China.
  • Risks from hard Brexit.


COMPARISON OF PROFIT & LOSS



1Q19 DBS OCBC UOB
Net Interest Income S$2,310m S$1,534m S$1,588m
+8.6% y-o-y +8.4% y-o-y +8.0% y-o-y
-0.9% q-o-q +0.9% q-o-q -1.2% q-o-q
Fee Income S$730m S$495m S$479m
-1.9% y-o-y -7.6% y-o-y -7.4% y-o-y
+15.0% q-o-q +4.4% q-o-q +2.6% q-o-q
Insurance n.a. S$276m n.a.
n.a. +34.0% y-o-y n.a.
n.a. +11.7% q-o-q n.a.
Net Trading Income S$443m S$285m S$243m
+20.4% y-o-y +203.2% y-o-y +38.9% y-o-y
+93.5% q-o-q n.m. n.m.
Other Non-Interest Income S$68m S$86m S$98m
-43.3% y-o-y +4.9% y-o-y +44.1% y-o-y
+33.3% q-o-q -14.0% q-o-q -51.0% q-o-q
Provisions S$76m S$249m S$93m
8.7bp 38.6bp 14.0bp
Net Profit S$1,651m S$1,231m S$1,054m
+9.3% y-o-y +10.7% y-o-y +7.8% y-o-y
+25.2% q-o-q +32.9% q-o-q +15.1% q-o-q



COMPARISON OF KEY RATIOS

1Q19 DBS OCBC UOB
Net Interest Margin (NIM) 1.88% 1.76% 1.79%
+1bp q-o-q +4bp q-o-q -1bp q-o-q
Loan Growth +5.7% y-o-y +4.9% y-o-y +12.2% y-o-y
+0.6% q-o-q +0.4% q-o-q +3.0% q-o-q
Deposit Growth +5.1% y-o-y +1.8% y-o-y +12.4% y-o-y
+0.3% q-o-q -0.4% q-o-q +5.0% q-o-q
NPL Ratio 1.49% 1.50% 1.50%
-1bp +1bp q-o-q -2bp q-o-q
Loan Loss Coverage 91.7% 78.2% 78.1%
+0.6ppt q-o-q +7.9ppt q-o-q +1.0ppt q-o-q
Core Equity Tier-1 CAR 14.1% 14.2% 13.9%
+0.2ppt q-o-q +0.2ppt q-o-q Unchanged
Book Value Per Share (BVPS) S$18.75 S$9.97 S$21.13
+2.5% y-o-y +8.3% y-o-y +5.3% y-o-y
+3.5% q-o-q +4.3% q-o-q +3.8% q-o-q





Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2019-05-14
SGX Stock Analyst Report BUY MAINTAIN BUY 30.500 SAME 30.500
BUY MAINTAIN BUY 14.620 SAME 14.620
NOT RATED MAINTAIN NOT RATED 99998.000 SAME 99998.000



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