Singapore Banks - Maybank Kim Eng 2019-06-24: Lower Rates. Limited Impact.

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

Singapore Banks - Lower Rates. Limited Impact.

On the back of heightened risks of Fed-rate cuts, MKE’s economics team has dropped its Singapore 3-month SIBOR forecasts by 20bps to 1.8% for 2019E and by 40bps to 1.6% for 2020E. This could squeeze NIMs and net interest income (NII) for banks.
Our sensitivity analysis suggests that the impact in FY19 will not be material. This year’s SIBOR has averaged 41bps higher than a year ago and banks have locked in higher loan yields in categories such as mortgages.
Lower interest rates may also defer their NPL cycle and keep credit charges low, mitigating the margin squeeze. An economic pick-up may result in higher loan growth while the yield-seeking may drive wealth-and fund-management fees.

Overall, we believe the sector will be able to defend dividends. Remain POSITIVE. We continue to prefer UNITED OVERSEAS BANK LTD (UOB, SGX:U11).

A 20bp cut to SIBOR assumptions lowers UOB (SGX:U11)’s 2019E NII by only 0.1% and by 0.4% for OCBC (SGX:O39), 1.2% for DBS (SGX:D05). Although we assume that 80% of their loans will be re-priced down within two quarters, the actual percentage may be lower, as around 25% of the mix is mortgages. The latter are currently being priced at board rates, which have a limited correlation with SIBOR.
Also, nearly half of their loans are booked outside Singapore, which is unaffected by SIBOR. On top of that, lower rates may spur more loan demand – particularly corporate credit. This could attenuate their margin squeeze.

New NPL formation is at its lowest in over 14 quarters, despite rising SIBOR YTD. Our credit-charge forecasts for this year assume a 7bp y-o-y increase with deteriorating asset quality. As such, falling interest rates may delay NPL formation and lower credit charges.
Our sensitivity analysis suggests a 2.6% increase in 2019E PAT for the sector for every 5bp drop in credit charges, which could potentially offset lower NIMs.

Lower interest rates may also stoke wealth-and fund-management fee income as clients scour for better yields. In 1Q18, when SIBOR weakened sequentially, sector fees & commissions increased 14% y-o-y. Arbitrage opportunities may also support trading income.
Overall, while Fed and corresponding SIBOR actions need to be closely watched, the latest cuts are unlikely to have a material impact on near-term earnings. This implies defensible 2019E dividends. (See DBS dividend history, OCBC dividend history, UOB dividend history)
With the least impact from lower forecasts, UOB remains our top pick.

Thilan Wickramasinghe Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2019-06-24

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