DBS OCBC UOB - RHB Invest 2019-05-14: More Upside For Non-Interest Income Ahead; Overweight

DBS OCBC UOB - RHB Invest | SGinvestors.io DBS GROUP HOLDINGS LTD (SGX:D05) OVERSEA-CHINESE BANKING CORP (SGX:O39) UNITED OVERSEAS BANK LTD (SGX:U11)

DBS OCBC UOB - More Upside For Non-Interest Income Ahead; Overweight

  • Maintain OVERWEIGHT with BUYs on our Top Picks, UOB (Target Price: SGD30.80) and DBS (Target Price: SGD30.80).
  • The two banks, together with OCBC, recently reported 1Q19 net profit, which met our and market expectations. 1Q19 NIM showed some q-o-q divergence, with DBS & OCBC recorded a widening whilst UOB saw a 1bp narrowing.
  • Looking ahead, rising lending yields (from lag effects of higher SIBOR) could help widen NIMs. Efficiencies from digitisation is another catalyst to drive banks’ earnings higher.



Expect general trend of NIM widening.



Mid-single digit 2019 loan growth forecast for all three banks.

  • In 1Q19, UOB recorded the strongest 3% sequential loan expansion, whilst DBS and OCBC saw their loans growing < 1% q-o-q each. Weak housing loans was one key reason for the overall loan softness.


Wealth management income recorded good sequential expansion.

  • This came on market sentiment recovery. The recovery was commendable, with DBS hitting a 44% growth, OCBC 52% expansion and UOB’s 19% (all sequential growth rates).


DBS, effective from FY19, will pay quarterly dividends



Maintain BUYs on DBS and UOB.

  • DBS’ SGD30.80 Target Price is pegged to 1.50x 2020F P/BV, which is derived from long-term ROE assumption of 13.8% vs 1Q19’s 14%.
  • UOB’s SGD30.80 Target Price is based on 1.29x 2020F P/BV, after we set long-term ROE assumption at 12.5% vs 1Q19’s 11.4%. We see NII expansion and lower CIR from digitisation driving ROE over the next few years.
  • Amongst the three banks, DBS should gain the most from the higher Singapore Interbank Offered Rate (SIBOR), whilst UOB is less exposed to Greater China, and therefore, more insulated from the US-China trade developments. On a side note, it is a coincidence that the target prices for both banks are SGD30.80.
  • Downside risks to our forecasts include higher impairment charges, and a ral funds rate, which could dampen NIM.


NIM trend

  • DBS guides for 5-6bps NIM expansion in 2019. DBS’ 1Q19 NIM of 1.88% was 1bp wider q-o-q and 5bps wider y-o-y. Asset yields rose 8bps q-o-q, whilst cost of funds climbed 7bps q-o-q. Management maintained expectations of 2019 NIM expansion, guiding for a 5-6bps widening from 2018’s 1.85%. DBS indicated 60% of loans were repriced in the first year of interest rate (eg SIBOR) rise, but another 40% repriced within the next two years. We forecast DBS’ 2019 NIM of 1.9%.
  • OCBC’s q-o-q NIM widened the most amongst peers. OCBC's 1Q19 NIM of 1.76% was 4bps wider q-o-q and 9bps wider y-o-y. The y-o-y increase was due to higher asset yields and hike in gapping income from money market placements. Loan repricing contributed to the q-o-q NIM widening. Management guided for 2019 NIM to be ~5bps wider than 2018’s 1.7%, and sees 2Q19 NIM being higher q-o-q. We forecast 2019 OCBC NIM of 1.76%.
  • UOB guided for flat 2019 NIM. UOB's 1Q19 NIM of 1.79% was 1bps narrower q-o-q and 5bps lower y-o-y. Sequentially, whilst Singapore NIM was unchanged at 1.49%, Malaysia NIM contracted 2bps to 1.99%. UOB was more aggressive in its fixed deposit expansion due to net stable funding ratio (NSFR), but will likely run off part of it as loans slowed in subsequent months. Management guided for 2019 NIM to be unchanged from 2018’s 1.82%, which factors in UOB’s intention to defend its mortgage market share amidst competition.


Net Interest Margin

DBS OCBC UOB
FY16 1.80% 1.67% 1.71%
FY17 1.75% 1.65% 1.77%
1Q18 1.83% 1.67% 1.84%
2Q18 1.85% 1.67% 1.83%
3Q18 1.86% 1.72% 1.81%
4Q18 1.87% 1.72% 1.80%
FY18 1.85% 1.70% 1.82%
1Q19 1.88% 1.76% 1.79%
FY19F 1.90% 1.76% 1.83%
FY20F 1.93% 1.80% 1.85%



2019 loan growth guidance of mid-single digit

  • DBS maintained its Singapore home mortgage market share at 31% despite 1Q19 housing loans declining 1% q-o-q. Management guided for SGD1-1.5bn of mortgage growth for 2019 vs SGD1.7bn rise in 2018. The non-trade corporate lending pipeline remains strong. DBS maintained its 2019 loan growth guidance of mid-single digits – our forecast: 5% expansion.
  • OCBC’s 1Q19 loans expanded 0.3% q-o-q, with building & construction loans up by a robust 4% q-o-q. We forecast 2019 loan growth of 4.5%.
  • UOB’s 2019 loan growth guidance maintained at mid-single digit. With 1Q19 loans having expanded 3% q-o-q, loan growth in the subsequent three quarters of 2019 is likely to be muted. Management said that the slowdown of new residential property launches will likely soften its mortgage book. We forecast 2019 loan expansion of 5%.


Non-Interest Income

  • DBS’ wealth management fees surged q-o-q. Wealth management, brokerage, and investment banking fee income fell 12% y-o-y due to high 1Q18 base from an exceptionally buoyant market sentiment during that period. However, on a sequential basis, wealth management fee income rose 44% from a recovery in market sentiment.
  • OCBC’s wealth management income surged 52% q-o-q to SGD921m, driven by higher insurance and private banking income. Bank of Singapore’s AUM rose 6% q-o-q to USD108bn. We are positive on wealth management income’s continued growth going forward.
  • UOB’s 1Q19 wealth management income saw 19% q-o-q growth, as the stabilisation of macroeconomic outlook led to improved customer confidence. Management guided for 2019 wealth management income growth of c.5%. The sequential doubling of net trading income is another key contributor to non-II expansion.


Expenses

  • DBS 1Q19 CIR was stable vs 1Q18. 1Q19 expenses rose 7% y-o-y, driven mainly by a 9% increase in staff costs. Total income expansion led to stable CIR.
  • OCBC recorded a sharp improvement in 1Q19 CIR, as total income rose a strong 15% y-o-y whilst expenses rose a milder 6%.
  • UOB management guided for CIR to be c.44% for 2019. 1Q19 CIR was 44.6% vs 1Q18’s 44.2% as total expenses rose 9% y-o-y due to higher performance-related staff costs and IT-related expenses.


Allowances

  • OCBC’s 1Q19 specific credit cost of 32bps was sharply higher than 1Q18’s 2bps. The majority of 1Q19 allowances were for loans to oil and gas support vessels and services (ie OSVs), which were already classified as NPLs. Despite the recovery in fuel oil prices, the OSV sector did not see a corresponding increase in vessel employment or rise in charter rates.


Dividend

  • Effective from FY19, DBS will pay dividends four times a year instead of two – this is to provide shareholders with more regular income streams. For 1Q19, DBS declared DPS of SGD0.30.
  • Both OCBC and UOB did not declare dividends for 1Q19.
  • See also DBS's dividends, OCBC's dividends, UOB's dividends.


ROE trend

  • Our long-term DBS ROE assumption is 13.8%. 1Q19 ROE was at 14% – the highest in more than a decade. It was even higher than 1Q18's 13.1%. Management guided that a 13% short-term ROE may be likely. We have assumed 13.8% long-term ROE, as we factor in gains from DBS’ digitisation efforts.
  • Our long-term OCBC ROE assumption is 12%. 1Q19 ROE was at 12%, as there were significant gains from net trading income. We do not assume these gains can be sustained. On the other hand, digitisation efforts should help to improve efficiency. Overall, we have assumed long-term ROE of 12%.
  • Our long-term UOB ROE assumption is 12.5%. 1Q19 ROE was at 11.4%. We have assumed 12.5% long-term ROE, as we factor in gains from digitisation efforts.


Valuation

DBS OCBC UOB
DBS Share Price OCBC Share Price UOB Share Price
Share Price @ 10-May-19 SGD 26.55 11.39 25.61
Market Cap ($m) (SGD) 67,922 48,438 42,706
(USD) 49,844 35,546 31,339
PE (x) Hist 11.9 10.5 10.5
Curr 10.9 10.2 10.2
Fwd 10.1 9.4 9.5
P/BV (x) 1.31 1.09 1.14
ROE (%) 11.5 11.1 11.3
ROA (%) 1.1 1.0 1.1
Yield (%) 4.5 3.8 3.9
YTD Total Return (%) 14.5 3.1 7.1
1-Month Total Return (%) 0.6 (0.9) (1.0)
3-Month Total Return (%) 11.6 1.1 4.2
6-Month Total Return (%) 14.3 1.3 6.7
1-Year Total Return (%) (3.8) (8.7) (7.6)





Leng Seng Choon CFA RHB Securities Research | https://www.rhbinvest.com.sg/ 2019-05-14
SGX Stock Analyst Report BUY MAINTAIN BUY 30.800 SAME 30.800
NEUTRAL MAINTAIN NEUTRAL 12.200 SAME 12.200
BUY MAINTAIN BUY 30.800 SAME 30.800



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