DBS GROUP HOLDINGS LTD (SGX:D05)
OVERSEA-CHINESE BANKING CORP (SGX:O39)
UNITED OVERSEAS BANK LTD (SGX:U11)
Singapore Banks - Rolling With The “In-crowd”
“Premiumization” of clients may lower NPL risks
- The Singapore banks have been actively lowering risk in their business mix with increasing focus on retail/wealth management, while largely limiting wholesale exposure to large corporates and larger SMEs. While this may not make them immune to asset quality risks heading in to a downturn, it should provide some cushioning together with the ability to better manage these risks.
- Despite an 8bps y-o-y credit charge increase that we forecast for 2020E, the sector is set to deliver a dividend yield of 5.2% - amongst the highest in the region.
- UOB (SGX:U11) is our top pick.
Focusing on lower risk, higher return
- Between 2013 and 2018, sector segmental ROAs from retail/wealth management has increased 51bps, while wholesale, global markets have contracted 17-18bps. This coincides with a 15% CAGR increase in private wealth AUM – particularly for DBS (SGX:D05) and OCBC Bank (SGX:O39).
- With good execution, wealth management consumes less capital, can generate higher fees and can potentially deliver higher ROEs compared to traditional asset-led businesses. We believe this has been a primary driver of the sector’s sharply wider (+19bps) returns on risk weighted assets (RoRWA). We expect continued growth in this segment.
- Media reports state that DBS plans to grow AUM by 7-8% annually till 2023, while OCBC and UOB are expanding their wealth offerings regionally. We conservatively estimate RoRWA should rise a further 4bps by 2021E.
Lower risk wholesale growth
- In the past 3-years - for the local banks - 76% of incremental loan growth was driven off corporate lending compared to 90% for the Singapore banking system. Their ROAs in this segment have declined since 2015. Read together with improving RoRWA, we believe their loan growth has been directed primarily at large corporates and larger SMEs where spreads are narrower because of higher credit ratings. These lower risk weightings.
High dividend visibility. UOB top pick
- Despite their more premium business mix, we cautiously estimate gross NPLs to rise 30bps to 1.71% by 2021E for the local banks. But with 93% provisioning coverage and strong core-Tier 1, the sector offers good 2020E dividend. See DBS Dividends; OCBC Dividends; UOB Dividends.
- Our top pick is UOB, given its strong track record of managing asset quality together with exposure to high quality SMEs and wealth management.
Thilan Wickramasinghe
Maybank Kim Eng Research
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https://www.maybank-ke.com.sg/
2019-09-24
SGX Stock
Analyst Report
28.050
SAME
28.050
11.050
SAME
11.050
29.130
SAME
29.130
