Singapore Banks - Maybank Kim Eng 2019-06-14: Self-Investing

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

Singapore Banks - Self-Investing

Singapore banks have been de-rated 12% since their peak in April (see DBS share price, OCBC share price, UOB share price). Profit-taking, slowing economic growth in Singapore and escalating US-China trade tensions were culprits, in our view. During this time, share buybacks have picked up steam.
YTD, DBS (SGX:D05) and OCBC (SGX:O39) have bought back more shares and much earlier than last year. We believe this is an indicator of emerging value.

Our scenario analysis suggests that NPLs would need to rise 35-80% from current levels to bump credit charges up to levels seen during the O&M crisis and GFC. Against a backdrop where none of their operating markets appears heading for a recession, such a scenario is unlikely, in our view.
The sector is trading at a 17% FY19E P/E discount to ASEAN banks despite offering 149bp higher dividend yields. BUY UOB (SGX:U11) and DBS.

YTD, DBS has bought back 25% of the volume it bought in 2018. Importantly, this was mostly done in May 2019, when its share price fell 14%. Historically, DBS was most active buying back shares in 3Q/4Q.
OCBC has bought back 60% of the volume it bought in 2018 and also much earlier. We believe that the banks buying on dips is an indicator of value emerging.
See also SGX Market Update: May 2019 SGX Share Buyback Consideration at S$123M, A 9-Month High; April 2019 SGX Share Buyback Consideration Led by OCBC, Keppel REIT & Hong Fok.

Based on our sensitivity analysis, we estimate that NPLs would need to rise 35-80% to reach the credit charges seen during the O&M crisis in 2017 and GFC in 2009. The resultant gross NPL ratios would be greater than the levels seen during those periods of deep distress. This is a scenario that is unlikely, in our view, as all their markets are forecast to have GDP growth in 2019-20E.
Moreover, even if they fully write down incremental NPLs, CET1 ratios should remain 380-470bps above regulatory minimums. This means that even if growth massively surprises on the downside, the sector has the balance-sheet strength to respond.

Following its recent correction, the sector is trading at a 17% FY19E P/E discount to ASEAN peers. Yet, the banks are offering some of the highest dividend yields in the region. We believe the sector will benefit from a flight to quality and defensiveness as macro conditions remain volatile.
Our preferred picks are UOB (BUY, Target Price: SGD28.97) and DBS (BUY, Target Price: SGD29.46).

Thilan Wickramasinghe Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2019-06-14

SGX Stock Analyst Report BUY MAINTAIN BUY 29.460 SAME 29.460

HOLD MAINTAIN HOLD 11.070 SAME 11.070

BUY MAINTAIN BUY 28.970 SAME 28.970