DBS GROUP HOLDINGS LTD (SGX:D05)
OVERSEA-CHINESE BANKING CORP (SGX:O39)
UNITED OVERSEAS BANK LTD (SGX:U11)
Banks - 2Q19F Preview ~ NIM Growth At Their Peaks
- A normalisation in trading and wealth management income is likely to weigh on 2Q19F earnings but repricing efforts should raise NIMs 1-2bp q-o-q.
- Forward guidance on NIMs (pending Fed rate cut), growth (-ve trade noise), wealth strategy (HK unrest) and capital management will drive share prices.
- Maintain NEUTRAL. Bank valuations are supported by benign credit conditions but catalysts are limited. Our preference is for UOB (SGX:U11), OCBC (SGX:O39), then DBS (SGX:D05).
Steady NII growth and stable credit costs marred by dip in trading
- We expect 2Q19F earnings to be characterised by lower trading income (coming off the strong kneejerk rebound in 1Q19), positive q-o-q NIM performance across all 3 banks and normalised credit costs (absence of general provision writebacks and O&G impairments).
- Other fee engines such as wealth management and IB are likely to have held steady from sustained client trading activity and M&A transactions. We think that UOB could record the best q-o-q profit performance on the back of long-awaited NIM expansion (+2bp), stable credit costs (+15bp) and a smaller dip in market-related income compared to peers.
- DBS could be the only bank to post a y-o-y expansion despite higher credit costs (+20bp) and weaker growth (+0.7%) in 2Q19 (2Q18: +12bp and +3%)
We expect to see FY19 NIM expansion peaking at 1-2bp in 2Q19
- We expect to see 1-2bp NIM expansion across the Singapore banks in 2Q19 as tailwind effects of their mortgage repricing efforts come through. Broadly, the banks raised board rates, in some cases up to +40-50bp, across 1Q19 towards higher effective SIBOR-linked rates. That said, contributions to NIM from banks’ mortgage books may be a touch lower in 2H19 as we note some competitive pricing to maintain market share.
- Beyond peaking SIBOR/SOR rates and the revision of mortgage rates, the key downside risk of a Fed rate cut in 2H19 will weigh on NIMs over FY20-21. We expect NIM expansion of +1bp for DBS, and +2bp for both OCBC and UOB in 2Q19; a review of FY19 guidance is possible.
US-China tensions may trigger a revision in loan growth targets
- We have accounted for slower regional growth amid the US-China trade tensions but the asset quality of the banks’ HK/China operations have remained intact.
- Looking into DBS and OCBC’s HK book, we believe that some of the slowdown in growth could be due to an overstocking of inventory in months prior to the recorded contraction. In keeping with the pace of system growth, a revision in loan growth targets (especially mortgages) may be on the cards. We forecast DBS, OCBC and UOB’s q-o-q loan growth to come in at +0.7%, +1.0%, and +1.1% in 2Q19.
Maintain Neutral; sector valuations inexpensive at -0.5 s.d. of mean
- The benign credit environment and consequently strong capital levels of the banks provide yield visibility, and we expect this to continue. We believe that the potential Fed rate cut(s) could be a double-edged sword – narrowing NIMs but also containing asset quality pressures. As a whole, banks’ valuations have run down to more palatable levels as trade tensions escalated in May 2019.
- We prefer UOB for yield visibility and smaller Greater China book. The bank trades at 1.1x FY19F P/BV (0.8s.d. below mean).
2Q19F Preview - Earnings expectations
DBS: 2Q19 results on 29 Jul 2019
- We expect DBS to report a net profit of S$1.5bn in 2Q19 (-9.9% q-o-q, +8.4% y-o-y). As in recent quarters, most of the growth is likely to have been driven by corporate loans in Singapore and Hong Kong. We understand that housing loan volumes remain subdued as secondary market transactions were particularly muted in months prior (loans disbursals for secondary market transactions are more immediate than those to the primary market). While the bank has guided for flatter mortgage growth of S$1.5bn-2bn in FY19, we think that this target may be revised lower to reflect market conditions. The bank may also have shed some of its lower-margin trade loans as volumes of this segment came off. We expect DBS’s loan base to have expanded by 0.7% q-o-q in 2Q19.
- We expect tailwind effects from the bank’s mortgage repricing exercise earlier this year to translate into continued NIM expansion of +1bp q-o-q to 1.89% in 2Q19. Having said that, we believe that the completion of the repricing exercise and an imminent Fed rate cut introduces downside risk to the bank’s 4-5bp NIIM guidance. Taking the bank’s guidance that most of its NIM expansion should come through in 1H19, a +2bp expansion in 2Q19 NIMs would result in net income of S$1.508bn.
- Apart from market-driven income lines, DBS’s fees and commissions are likely to have held steady. The downer to this set of results would likely be the bank’s trading and wealth management income which reached stellar highs in 1Q19. We expect to see credit costs rising to 20bp in 2Q19 in the absence of writebacks in general provisions (11bp writeback in 1Q19). The bank maintains its guidance for 20-25bp in specific provisions for FY19; we expect this to translate to 20bp in credit costs.
OCBC: 2Q19 results on 2 Aug 2019
- We expect OCBC to post S$1.2bn in net profit for 2Q19 (-2.5% q-o-q, -0.7% y-o-y). Loan drawdowns are anticipated to have picked up by 1% q-o-q in 2Q19 from overseas investments in data centres and for use in the hospitality sector in UK and Australia. As with the broader banking industry, OCBC’s mortgage growth stayed tepid. We believe that there could be a further slowdown in loans to Greater China as given an overstocking of inventories ahead of an escalation in trade tensions in months prior to 2Q19.
- We believe that OCBC’s asset yields would have risen further from the mortgage repricing done over Jan-Apr 2019, albeit by a narrower +2bp q-o-q in 2Q19. Although we would expect OCBC to benefit from the uptrend in 1M/3M HIBOR, we understand that some of the rise in rates may not have been captured as the bank has been shifting its customers onto prime-based loans.
- Recall that additional provisions for OCBC’s O&G portfolio had necessitated 38bp of credit costs in 1Q19, effectively resulting in higher full-year impairments of 19-22bp in FY19. Adjusting for the one-off charges, lower credit costs of 13bp in 2Q19 could help offset some of the earnings blow from our expectations of lower MTM gains from securities held by Great Eastern’s shareholder funds. We expect other earnings drivers such as insurance and wealth income to hold steady, with the latter potentially poised to benefit from flows out of Hong Kong in the medium term given the current political climate.
- Capital management remains one of investors’ key concerns on OCBC. Notably, the bank is strongly capitalised with a CET-1 ratio of 14.2% in 1Q19; its dividend policy has been maintained at a 40-50% payout ratio and its option for a scrip dividend scheme has been enabled.
UOB: 2Q19 results on 2 Aug 2019
- We expect UOB to record a core net profit of S$1.05bn in 2Q19 (-0.6% q-o-q, - 2.9% y-o-y). We understand that the bank is on track to meeting its mid-single-digit loan growth guidance in FY19. Having done +3% q-o-q in 1Q19 on the back of delayed drawdowns, we forecast a lower +1.1% q-o-q expansion in 2Q19 as system loan growth stayed tepid.
- UOB’s NIM performance in FY18 had been lacklustre, especially when compared to peers. While its smaller 45% CASA proportion could be blamed for this (DBS: 58%, OCBC: 47%), we observed that higher funding costs are not to be blamed for this, but instead, the timing in which loan drawdowns coincide with the bank’s strategy in shoring up on funding ahead of expected (previous) rate hikes. At this stage, we believe that a nominal pause in picking up expensive deposits could allow for some degree of NIM expansion. We expect UOB’s NIMs to have expanded +2bp in 2Q19.
- Benign credit conditions are likely to translate to stable credit costs; our forecast of +15bp in 2Q19 goes in line with the bank’s guidance of potentially being on the lower end of its 20-25bp expectations in FY19.
Valuation and recommendation
- For 2Q19, we expect to see positive NIM expansion for all 3 banks alongside better loan growth for DBS and OCBC. Our outlook for margin expansion beyond 2Q19 is less sanguine given the completion of repricing exercises and a potential retracement SIBOR/SOR as the Fed cuts rates.
- On non-II, fee engine drivers should hold steady while trading and wealth income normalise from their very strong performance in 1Q19. We are not expecting negative credit cost surprises - we think that OCBC should have seen its last stretch of provisions for its O&G portfolio barring a sustained downturn in oil prices or utilisation rates from this point.
- Most of the 7-19% share price gains of Singapore banks up until Apr were erased in May on the back of escalated US-China trade tensions and profit-taking post-dividen. Valuations of the banks have remained broadly inexpensive over the year, but catalysts for the sector are limited. Maintain NEUTRAL.
Preference for the sector: UOB, OCBC, then DBS
- Beyond having a smaller Greater China franchise, we believe that UOB could be the key beneficiary of a relocation in supply chains from China to Southeast Asia given its ASEAN focus. Valuations are inexpensive at 1.1x FY19F P/BV (0.8s.d. below long-term mean) and supported by a c.50% dividend payout.
- OCBC’s YTD share price performance has underperformed its peers, rising just c.2% vs c.9-11% in the latter. The bank trades at 1.2x FY19F P/BV (-0.8s.d. below long-term mean).
- We believe that a re-rating could be on the cards given more clarity on its capital management plans.
- DBS is the most expensive amongst peers at 1.4x FY19F P/BV (ROE: 12.6%, +1 s.d. above long-term mean). YTD, the bank has outperformed peers and the STI, running up +11% vs STI’s +9%. However, the bank has since underperformed peers since the trade wars escalated in May 2019 (DBS +8% vs peers’ +9-13%).
- Relative to peers, we think that DBS’s earnings could be most sensitive to a turn in interest rates, and the bank has the largest exposure to the HK and Greater China region among its Singapore peers.
Andrea CHOONG
CGS-CIMB Research
|
LIM Siew Khee
CGS-CIMB Research
|
https://research.itradecimb.com/
2019-07-19
SGX Stock
Analyst Report
27.640
SAME
27.640
12.590
SAME
12.590
29.580
SAME
29.580
