Banks - CGS-CIMB Research 2019-06-19: Enough Pie To Be Shared, Virtual Bank Or Not

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

Banks - Enough Pie To Be Shared, Virtual Bank Or Not

Our recent Singapore strategy marketing tour saw investors finding their feet at more attractive entry levels after the 12-16% sell-down in May 2019.
Concerns centered around a Fed rate cut (could de-rate sector), the threat of virtual banks (low in near term), and NIM expansion (optimistic for 2Q19).
Maintain NEUTRAL. Cross border business flows and loan growth still muted. Strong asset quality and robust capital are main support pillars for the sector.

The advent of a Fed rate cut was among SG and HK investors’ key concerns on Singapore banks. A cut compounds our fears of a sequential de-rating of the sector following the 12-16% dip in SG banks’ share prices in May 2019 as investors trimmed positions on the back of the escalation in US-China trade tensions (see DBS share price, OCBC share price, UOB share price).
That said, we believe that the bank’s steady asset quality metrics and robust capital levels provide some baseline support for the sector at current valuations (1.1x FY19 P/BV, ROE: 12%). We remain NEUTRAL on the sector. Our preference is UOB (SGX:U11), OCBC (SGX:O39), then DBS (SGX:D05).
Upside/downside risks are a pick-up in regional growth/a Fed rate cut.

We think that virtual banks are not likely to threaten the primary lending businesses of DBS, OCBC and UOB in the near term given the need for significantly large funding and capital bases to cater for corporate companies’ needs and the time required to scale up their operations. The underserved pockets of the retail and SME segments (possibly weaker credit profiles) are likely to be Grab’s and other virtual bank applicants’ focus points given their capital constraints.
The high bank account penetration rate in SG (98%) could also translate into stiffer competition from the incumbents, who already have digital platforms in place (DBS’s Digibank and UOB’s TMRW bank). We believe that the banking pie is large enough to be shared, with various players serving different segments.

Investors remain wary on the slowed loan growth in the region and its corresponding effects on NIMs. To this end, we previously revised our expectations downwards to c.4- 5% across the banks. We are optimistic of seeing further NIM expansion in 2Q19 from tailwind effects of the banks’ repricing exercises.
That said, 2H19 earnings growth is likely to depend more on non-II performance, particularly wealth, and containing credit costs.

Basel IV is slated to come into effect beginning Jan 2022. The reforms largely centre around standardising the calculation of risk-weighted assets to improve the comparability of banks’ capital ratios. We believe that the net impact on Singapore banks will be manageable.
DBS expects its RWAs to increase by c.3% (S$8bn) on a pro-forma basis – barring any optimisation measures, this would reduce capital by c.40bp.

HOLD, Target Price S$27.64.
Loan growth came in at just 0.6% in 1Q19, but the bank maintains its mid-single-digit guidance for FY19. NIM expanded steadily by 1bp in 1Q19 – on track to meet our 5bp expectations.

HOLD, Target Price S$12.59.
Despite the weak 0.3% q-o-q loan growth showing in 1Q19, OCBC recorded the strongest NIM expansion amongst peers. More repricing effects could spill over into 2Q19, thus boosting margins.

ADD, Target Price S$29.58.
UOB’s 1Q19 loan growth was the strongest amongst peers at +3.0% q-o-q. However, NIM expansion has underperformed its peers, having contracted for four consecutive quarters.

Andrea CHOONG CGS-CIMB Research | LIM Siew Khee CGS-CIMB Research | https://research.itradecimb.com/ 2019-06-19

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