Banks - CGS-CIMB Research 2019-05-26: NEUTRAL (From OVERWEIGHT)

Singapore Banks - CGS-CIMB Research | SGinvestors.io DBS GROUP HOLDINGS LTD (SGX:D05) OVERSEA-CHINESE BANKING CORP (SGX:O39) UNITED OVERSEAS BANK LTD (SGX:U11)

Banks - NEUTRAL (From OVERWEIGHT)


Positive catalysts to look out for


Asset quality holding steady.

  • Asset quality across the banks held up well in 1Q19, with benign levels of net new NPA formation although credit cost performance was mixed.
  • The specific provisions of DBS (SGX:D05) and UOB (SGX:U11) were below their cycle averages, and guidance for FY19 credit costs took on a more positive tone. OCBC (SGX:O39) had taken on more provisions for its oil and gas support vessels and services (OSV) sector NPLs; we believe this could be the last hit from its O&G portfolio, and expect quarterly credit costs to normalise downwards.
  • The pause in US Fed rate hikes also provided some support to the banks’ asset quality metrics.

Easing pressure on funding costs.

  • We believe that the mounting funding pressures seen over FY18 have cooled off somewhat with the moderation in regional loan growth and pause in US Fed rate hikes. The incessant rise in promotional fixed deposit rates across the industry, especially towards the later part of 2H18, has started to ease, and its effects have started to show in the banks' funding costs.
  • The 1Q19 rise in deposit costs across the local banks slowed from 12-16bp in 2Q18 to 7-11bp in 1Q19.


Negative catalysts to fear


Slowing loan growth.

  • Domestic S$ lending opportunities could be crippled by both sluggish mortgages and “stand-still” corporate actions. In particular, Greater China/HK-related loan growth has slowed significantly since 3Q18.
  • While the banks have tempered their loan growth expectations to a more moderate mid-single-digit in FY19, an escalation in US-China trade war retaliatory measures may see cross-border trade activity being all the more subdued. At this stage, we do not discount the possibility of regional growth coming in below our already lowered expectations.

Virtual lending could put some pressure on SME loan margins.

  • The Monetary Authority of Singapore has been mulling the decision to grant virtual banking licences to digital-only banks operated by financial technology (fintech) firms. The target segment for virtual banks would most likely be retail and SME customers given their smaller capital bases at start-up. This could pose a threat to the local banks if these virtual banks are able to scale up with speed.
  • Amongst Singapore banks, we estimate UOB has the largest proportion of SME loans, at 21% (or S$56bn) of its loan book in FY18. We are cognisant, though, that this risk may pan out only in the longer term.


Risk of earnings cuts in the next 2 quarters? YES

  • An escalation in retaliatory measures by either the US or China in terms of further trade tariffs could further dampen regional loan growth and cross-border transactions.
  • Capital market volatility (or downturn) and a general risk-off sentiment as a result of the US-China trade tensions could see market-related income lines suffer, as was the case in 4Q18 when the tariffs were first introduced; these income lines accounted for 13-18% of Singapore banks’ total income in FY18.


Stock preference: UOB the most preferred, DBS the least

  • Our preferred pick is UOB as its valuations look the most attractive (at 1.04x CY19F P/BV) after UOB share price de-rated recently. Although OCBC appeared to withstand better in terms of share price performance vs. DBS and UOB, we think UOB is best-placed to benefit from a shift in supply chains out of Greater China into ASEAN. Its dividend payout ratio is likely to be maintained at 50% in FY19F, in our view. See OCBC share price.
  • We downgraded DBS to Hold in view of its expensive valuations. At current DBS share price, P/BV valuations are +0.5 s.d. of its long-term mean. We think an escalation in US-China trade war retaliations could affect DBS the most given its 30% loan book exposure to Greater China/HK (highest amongst Singapore banks) and that about 18% (trading and wealth management income) of its total income was derived from capital markets in FY18. See report: DBS Group - Caught In The Crossfire.
  • See also report: DBS OCBC UOB Banks - Trump Card.


See also






Andrea CHOONG CGS-CIMB Research | LIM Siew Khee CGS-CIMB Research | https://research.itradecimb.com/ 2019-05-21
SGX Stock Analyst Report HOLD MAINTAIN HOLD 27.640 SAME 27.640
HOLD MAINTAIN HOLD 12.590 SAME 12.590
ADD MAINTAIN ADD 29.580 SAME 29.580



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