DBS OCBC UOB - CGS-CIMB Research 2019-08-03: A Strong Showing From All 3 Banks


DBS OCBC UOB - A Strong Showing From All 3 Banks

  • All 3 banks beat in 2Q19 with UOB (SGX:U11) ranked first, lifted by unexpected non-II and below-cycle credit costs. OCBC (SGX:O39) surprised with S$0.25 DPS.
  • Positive NIM for all - DBS (SGX:D05) and OCBC +3bp, UOB finally played catch-up with +2bp. Our base case for NIM in FY20F is a 1 to 2bp contraction.
  • UOB still our top pick as a “safer” bank given trade tensions and its attractive 1.1x P/BV valuation. We switch to DBS as 2nd pick for better asset quality.

Who won the earnings outperformance race?

  • SG banks’ 2Q19 reporting felt like a race for
    1. final breath of NIM expansion,
    2. treasury income and wealth management (WM) and
    3. dividend generosity.
  • UOB won the race with the strongest +11% q-o-q profit growth to S$1.17bn on stronger treasury income, WM and lower credit costs. It was the only one with q-o-q ROE improvement. UOB finally showed a much needed +2bp q-o-q NIM.
  • DBS’s beat was driven by its +3bp NIM and impressive WM and treasury income riding on capital markets.
  • OCBC delivered the best q-o-q loan growth (+1.6%) but earnings beat was marginal, affected by GE and credit costs.
  • Across the banks, WM will continue to be the hope for key fee income growth.

Generous capital returns for FY19F, 4-5% dividend yield for all

  • DBS kept its promised quarterly DPS of S$0.30/share, OCBC raised to S$0.25 and UOB slightly up to S$0.55 for 1H19.
  • The higher-than-expected 43% payout (vs. our 40%) in OCBC signals a slower pace of anticipated M&A. We up OCBC DPS to S$0.50 for FY19 (44%), within its guidance of 40-50%. It is backed by the strongest CET 1 of 14.4%.
  • UOB kept its guidance of 50% for FY19, implying S$0.70-0.75 for 2H19 (2H18: S$0.70).

Differing views on rates and 2H19 NIM outlook

  • UOB and OCBC are slightly more optimistic on their 2H19 NIM (OCBC: flat to +1bp, UOB: implied +2bp/qtr), on the premise of lagged repricing effects and funding mixture. DBS is cautious and expects 1-3bp NIM contraction. OCBC is likely to achieve the strongest NIM expansion among peers by end-19 with +9bp y-o-y to 1.79%, despite an aggressive view of two more rate cuts by end-19 (3 total in 2019).
  • DBS and UOB expect one more rate cut by end-19. All three are unanimously unsure of 2020 direction. Our base case for FY20F NIM is a 1 to 2bp contraction on tipping SOR/LIBOR/HIBOR rates.

Gazing into 2020, what levers to pull?

  • Maintain sector NEUTRAL. The sector could be range-bound by noises over trade tensions and the Fed’s hawkish/dovish tone. Our best estimate for 2020 levers:
    • DBS - GP write-back given its high NPL coverage of 99% in 2Q19,
    • OCBC - return of excess capital if no M&A and capital savings from Wing Hang’s adoption of IRB.
    • UOB could gradually release the S$12bn FD buffer built in 1Q19.

Flexing wealth management muscles and riding on capital markets

  • We had expected a normalising trend for trading and WM after a decent 1Q19. Instead, they made up most of the banks’ outperformance.
  • For UOB, more than half of the total income beat came from net trading income and gains from investment securities, the other half came from fee income as wealth management grew by 18% q-o-q from a lower base than peers.
  • Similarly for DBS, about half of its total income beat came from treasury-related income and about 1/3 from NII and less than 1/3 from fee income. It looks like it is able to keep up with the quarterly run rate of above S$300m.
  • OCBC did not enjoy as much increase in non-NII as peers as only part of its insurance re-valued gains are reflected in P&L.
  • Going forward, we expect non-NII to drive earnings momentum, given the muted outlook loan growth.

Loan growth from delayed corporate drawdown, 2H19 recovery in mortgages?

  • Broadly, we think that corporate demand is likely to support loan growth figures in 2H19. Growth drivers across the banks were diverse in 2Q19 – DBS saw most of its growth coming from trade loans, a segment which had contracted/was flattish for the past three quarters. Customers expanding overseas and drawdowns relating to en bloc transactions had spurred most of OCBC’s credit growth while residual effects from delayed loan utilisation from 4Q18 and real estate deals drove that of UOB.
  • Mortgage growth in 1H19 had been tepid for the industry as a whole on the back of subdued primary and secondary transactions since the property cooling measures were introduced in Jul 2018. That said, increased bookings (c.+60%) in 2Q19 could translate into a recovery of the contraction (0-4% across the three banks) in home loans seen over 1H19. Net mortgage growth could be flattish y-o-y in FY19.
  • UOB is poised to have the strongest loan growth showing in FY19 (we expect +6.2% y-o-y), followed by DBS (+4%) and OCBC (+3.5%).

Watchful on credit costs

  • While a lower interest rate environment may reduce repayment burdens for corporates and consumers alike, we keep watch on potential asset quality blips given the sustained slower growth environment. Credit costs have so far remained confined to idiosyncratic exposures.
  • Net new NPA formation has been higher q-o-q for all three banks. DBS posted S$286m in 2Q19 (FY18 quarterly average S$274m), OCBC had S$390m (quarterly average of S$304m in 9M18 – 4Q18 was exceptionally high due to a O&G exposure), and UOB recorded S$357m (FY18 quarterly average of S$283m).

Valuation and recommendation

UOB is still our top pick, switch from OCBC to DBS

  • Maintain NEUTRAL on the sector. Valuations are inexpensive for UOB and OCBC as both are trading at c.1.1x CY19 P/BV (-1 s.d. below long-term mean).
  • We now prefer DBS over OCBC given the latter’s three consecutive quarters of negative credit costs surprise. Although we view DBS as more sensitive to interest rates movements and likely to see the most contraction than peers in 2020F, we believe the resilience in WM, high NPL coverage and the absence of volatility in insurance income more than compensate.

See company reports:

Andrea CHOONG CGS-CIMB Research | LIM Siew Khee CGS-CIMB Research | https://research.itradecimb.com/ 2019-08-03
SGX Stock Analyst Report HOLD MAINTAIN HOLD 27.590 SAME 27.590