DBS GROUP HOLDINGS LTD (SGX:D05)
OVERSEA-CHINESE BANKING CORP (SGX:O39)
UNITED OVERSEAS BANK LTD (SGX:U11)
Singapore Banks 3Q19 - What To Expect
Potentially stronger loan growth, but higher NPL risks
- UOB (SGX:U11) will be reporting 3Q19 results on 1 Nov, followed by OCBC (SGX:O39) on 5 Nov and DBS (SGX:D05) on 11 Nov.
- Stronger than expected system loan growth – especially in ACU – may potentially drive upside surprises for UOB and OCBC given their sizable ASEAN footprint. NIMs may likely be a mixed bag given falling SIBOR, which may have a negative impact on DBS with their larger, slow to reprice CASA funding base.
- Asset quality will be primary focus for us, in the tougher macro backdrop as well as the weakening trend we have observed in 1H19. Nevertheless, stronger cost management, improved fee income – especially from wealth management – should provide tailwinds for y-o-y earnings momentum to remain positive.
Stronger than expected loan growth
- 3Q19 ACU loan growth up to Aug averaged 7.5% y-o-y – its highest pace of growth since 4Q18. This stronger than expected lending growth, likely driven by capacity relocation from China to ASEAN, should potentially result in upside surprises for UOB and OCBC where a fifth of their loans are booked in ASEAN.
Mixed bag of NIMs
- With a bulk of domestic mortgage repricing behind them, NIMs are likely to see limited growth, if any. The 12bp fall in SIBOR since Aug following interest rates cuts by the US Fed, may potentially surprise DBS NIMs on the downside. Recall DBS’s slow to reprice CASA funding mix account for nearly 60% of deposits.
Higher new NPL formation
- New NPL formation (excluding recoveries & write-backs) jumped 62% q-o-q in 2Q19. Sectorally, this growth is driven by manufacturing, construction etc., albeit off low bases. Given past expansion in lending to these segments and tougher macro conditions, new NPL formation may likely accelerate q-o-q in 3Q19.
- Nevertheless, write backs from provisions taken during the O&M crisis in 2017 may provide some offset as this sector shows some signs of recovery. Overall, new NPL formation and resultant credit charges need to be closely watched, in our view.
Earnings momentum to remain positive
- We expect non-interest income to see improvements in 3Q19. New private banking inflows from North Asia should drive better fees for DBS and OCBC.
- Lower interest rates should improve mark-to-market gains in OCBC’s insurance division. UOB’s regional integration should also support better fees as their loan book grows.
- Together with stronger loan growth, we expect y-o-y earnings momentum to remain positive for the sector, supporting strong dividend visibility – which is amongst the highest in the region.
- UOB is our top pick.
Thilan Wickramasinghe
Maybank Kim Eng Research
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https://www.maybank-ke.com.sg/
2019-10-11
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