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

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

Singapore Banks - Lower Rates. Limited Impact.


SIBOR forecast cuts to have limited impact for now

  • 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).



Only minor impact on NII

  • 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.


Asset quality stronger for longer?

  • 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.


Dividend visibility intact

  • 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 historyOCBC dividend historyUOB 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



Advertisement



MOST TALKED ABOUT STOCKS / REITS OF THE WEEK



loading.......



ANALYSTS SAY


loading.......