Singapore Banks - DBS Research 2019-10-23: NIM Pressures Likely To Kick In


Singapore Banks - NIM Pressures Likely To Kick In

  • NIM pressures likely to kick in on lower interest rates and competitive pricing pressures.
  • Credit costs on the radar amidst global economic slowdown.
  • Expect loan growth trajectory to be varied, in line with guidances.
  • Remain neutral on sector; UOB (SGX:U11) is our preferred pick.

NIM expansion cycle likely over in lower rate environment.

  • In 1H19, Singapore banks continued to see NIM expansion of 1- 7bps from 4Q18, on the back of ongoing loan repricing on higher base rates. We believe that the NIM expansion cycle is likely to be over as loan yields and asset yields start to fall amidst a lower interest rate environment. In 3Q19, average 3MSIBOR declined c.5bps q-o-q.
  • Regionally, we believe NIMs will also come under pressure as central banks across Southeast Asia begin to cut rates. Our sensitivity analysis shows that every 25-bp cut in interest rates may have 1-3bps impact on NIM for FY20F, while every 10-bp change in NIM has 5-7% earnings impact on banks’ FY20F bottom line.
  • For OCBC (SGX:O39) and UOB (SGX:U11), which are more dependent on fixed deposits as deposit base, lower cost of funds may also buffer some of the NIM decline.

Competitive pressures.

  • According to our channel checks, mortgage rates offered across Singapore banks for purchase or refinancing have also declined by 20-30bps during the quarter. At the same time, upward repricing of existing mortgages on higher base rates has largely been completed.
  • We believe as banks continue to take on a more conservative stance amidst a slowing economy, flight to quality loans may also put pressure on loan yields.

Modest loan growth into 3Q19.

  • Loan growth in 2Q19 varied among Singapore banks, where DBS/OCBC/UOB saw 1.0%/1.5%/1.2% q-o-q growth. We believe q-o-q loan growth for 3Q19 is likely to be capped below 2Q19’s levels as regional economies slow.
  • As MAS’s latest statistics in August remained resilient as August industry loan growth (DBU + ACU1) was 1% m-o-m/5.1% y-o-y, having seen June-July 2019 loan growth moderating to 0.2-0.3% m-o-m, we continue to believe that our full-year loan growth estimate for FY19F of c.5% is intact.
  • UOB’s stronger loan growth in 1H19 was attributed largely to property-related loans and we continue to expect UOB to hit its high single-digit loan growth guidance on the back of cross-border business activities.

Domestic mortgages declined for seventh consecutive month.

  • For the seventh consecutive month, Singapore banks’ mortgage book continued to decline m-o-m, registering a 0.2% m-o-m decline in August 2019. Year-to-date, domestic mortgages have declined 1.4% collectively.
  • We believe the key to mortgage book lies in secondary market transactions, which in 2Q19 recovered from 1Q19’s volumes by 27.6% q-o-q. We believe this should support the decline in mortgage loan book and do not expect the mortgage book to contract severely, unless there is an accelerated slowdown in the economy with massive unemployment.

Wealth and trading income should provide support for 3Q19 earnings.

  • In 2Q19, wealth management income improved 5- 18% q-o-q across Singapore banks as more activities were seen with investors cautiously seeking to navigate the markets.
  • We believe that going into 3Q19, wealth management income, as well as stable customer flow-related trading income, should continue to support 3Q19 earnings.

Continue to keep watch on asset quality.

  • We expect credit costs to continue normalising against a slower global growth environment to c.20bps for FY19F (FY18: 16bps). However, we continue to be watchful for downside risks, as of 2Q19, pockets of stress experienced by banks’ customers were non-geographic and non-sector specific.
  • Recall that OCBC saw one-off oil and gas provisions in 1Q19 while in 2Q19, OCBC saw new NPL formation uptick driven by Indonesia’s CPO portfolio and UOB saw new NPL formation arising from a real estate-related exposure in the US. In both cases, no special provisions were required. We believe that credit costs is the card to current valuations.

Valuation and Recommendation

Asset quality the wild card.

  • Singapore banks are now trading at c.1.1-1.2x FY20F BV. We believe that Singapore banks may be a beneficiary should liquidity flow into Asia. Valuations would also be supported by strong capital levels and decent dividend yields in view of heightened uncertainties arising from the trade war and investors’ search for yields, should asset quality continue to hold up against slowing global growth.

UOB our preferred pick.

Key risks

Asset quality trend reversal.

  • A larger-than-expected NPL arising from generic sectors could indicate risks of a worse-than-expected slowing economy, and unwind expectations of credit cost and NPL declines, thus posing risks to earnings.
  • Based on our sensitivity analysis, every 5-bp uptick in credit costs may impact sector earnings by c. 2.5%.

NIM pressures.

  • According to our sensitivity analysis, every 25-bp cut in interest rates may have an impact of 1-3bps on NIM for FY20F, while every 10-bp change in NIM has a 5-7% earnings impact on banks’ FY20F bottom line. Should there be more rate cuts than expected (market is currently pricing in another Fed cut by end of FY19F), NIM pressures will adversely affect earnings.

Slower-than-expected loan growth.

  • A technical recession in Singapore, breakdown in US-China trade talks, disappointing macro indicators and a less firm macroeconomic outlook going forward could temper our loan growth expectations. Although loan growth is less sensitive to earnings, any deceleration as a result of weaker sentiment would dent top-line prospects.
  • A sharper-than-expected slowdown in the Singapore property market will cause mortgage books to shrink faster. However, we remain watchful that any trade diversion flows may bolster cross-border loan growth in the Southeast Asian region in the longer term.

Rui Wen LIM DBS Group Research | https://www.dbsvickers.com/ 2019-10-23
SGX Stock Analyst Report NOT RATED MAINTAIN NOT RATED 99998.000 SAME 99998.000