Singapore Banks - DBS Research 2019-08-02: A Respectable Quarter

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

Singapore Banks - A Respectable Quarter

• 2Q19 earnings within our expectations but exceeded consensus estimates by c.4-10%.
• Asset quality remains benign, though there was an uptick in new non-performing assets (NPA) formation.
• Diverging NIM and loan growth trends through 2H19.
• UOB remains our preferred pick over OCBC.

Singapore banks' earnings beat consensus by c.4-10% largely supported by strong net interest income.

• Singapore banks’ 2Q19 earnings came in within our expectations but beat consensus estimates by c.4-10% amid a slowing economy and market uncertainty (Net profit: DBS S$1,603m (+17% y-o-y, - 3% q-o-q); UOB S$1,168m (+8% y-o-y, +11% q-o-q); OCBC S$1,223m (+1% y-o-y, -1% q-o-q). This was largely led by strong net interest income growth across the board, on top of strong non-interest income growth with the exception of OCBC, which saw non-interest income dragged by lower contributions from Great Eastern (SGX:G07).
• Notably, all banks reported strong wealth management income growth (DBS: +11% y-o-y/ +5% q-o-q) ; UOB: +21% y-o-y/ +18% q-o-q; OCBC: +8% y-o-y/ +10% q-o-q), benefitting from higher AUMs and investment product sales.

Asset quality remains benign, though there was an uptick in new NPA formation.

• NPL ratios across the banks were unchanged from previous quarter at 1.5%, though new NPAs saw an uptick from previous quarters:
  • DBS - in relation to a government-backed Indonesian entity,
  • UOB - US-related real estate entity;
  • OCBC - Indonesia CPO portfolio.
• According to the banks, these loans are well-collateralised, hence requiring minimal special provisions. With the exception of OCBC which saw higher credit costs in 1Q19 due to further provisions made in relation to its oil and gas portfolio, all banks’ total credit costs for 1H19 were well within guidance, though we expect credit costs to further normalize in 2H19.

Diverging NIM and loan growth trends expected for 2H19.

• We are seeing some divergence in guidance for NIM and loan growth as OCBC continues to expect some NIM uptick in 3Q19, while UOB expects NIM to be largely stable in 3Q19. UOB has also revised its loan growth guidance to high single digit for the full year, as year-to-date loan growth stands strong at 4.3%, while OCBC and DBS maintained guidance for mid-single digit loan growth.
• See attached PDF report for detailed q-o-q and y-o-y comparison on recent release of 2Q19 Singapore banks results.

UOB remains preferred pick over OCBC.

• We continue to prefer UOB (BUY, Target Price S$29.20) as a defensive pick for its high dividend yield of c.4.7%.
• UOB has the least exposure to Greater China among the local banks as well as a more defensive wealth franchise. We believe its strong balance sheet will continue to support its growth momentum into 2H19.

Rui Wen LIM DBS Group Research | https://www.dbsvickers.com/ 2019-08-02

SGX Stock Analyst Report NOT RATED MAINTAIN NOT RATED 99998.000 SAME 99998.000

HOLD MAINTAIN HOLD 11.500 SAME 11.500

BUY MAINTAIN BUY 29.200 SAME 29.200