Singapore Banks - DBS Research 2019-12-03: Dividend Yields A Bright Spot 


Singapore Banks - Dividend Yields A Bright Spot 

  • Earnings growth to slow in FY20F with fee income providing support.
  • Valuations underpinned by dividend yield and asset quality.
  • UOB continues to be our preferred pick.
  • Key risks: Lower than expected NIM, deteriorating credit environment, Hong Kong exposure.

Trends to watch in 2020

Earnings growth to slow in FY20F; fee income to support income growth.

  • Against a moderating macroeconomic environment, we believe earnings growth will slow to c. 1-2% in FY20F on lower NIM and higher credit costs compared to FY19F. We believe Singapore banks will continue to monitor their cost-to-income ratios as income growth slows while balancing the need to invest in technology. As earnings growth is slowing, we believe ROE has likely peaked.

NIM set to decline.

  • We expect NIM to decline 5-7bps in FY20F, with downside risk on more rate cuts than expected. There is potential downside to SIBOR and we continue to keep watch on MAS which has signaled its willingness to further ease should the macroeconomic backdrop worsen.

Fees and other non-interest income to support topline.

  • Fee income will continue to be a bright spot for Singapore banks in FY20F with Singapore banks guiding for mid-single digit to double digit growth.

Moderating loan growth.

  • We are projecting that overall loan growth for Singapore banks will slow from c.5% in FY19F to c.4% in FY20F amid US-China trade tensions. In the medium-to-longer term, we believe Singapore banks may benefit from broader cross-border flows into Southeast Asia.

Higher credit costs.

  • We expect credit costs for Singapore banks to head higher to 20-24bps in FY20F (from 18-22 bps in FY19F), with downside risk to the economic outlook should growth forecasts in underlying economies worsen, leading to potential earnings risk from special provisions.

Digital banking.

  • With MAS accepting applications for five new digital bank licenses until the end of 2019, the banking landscape in Singapore is headed for changes. In the meantime, Singapore banks continue to work on their digital bank strategies both locally and abroad.

Inorganic opportunities.

  • Reportedly, some Singapore banks are evaluating inorganic opportunities in Indonesia as their high CET1 ratios that are well above the comfortable operating range. We remain watchful on execution of potential merger and acquisition opportunities.

Recommendation and valuation

UOB is our preferred pick.

  • We continue to like UNITED OVERSEAS BANK (UOB, SGX:U11) (BUY, Target Price S$29.20) as a defensive pick for
    1. its attractive dividend yield of c. 4.7%,
    2. smaller exposure to China among the local banks and a more defensive wealth management franchise as UOB continues to navigate cautiously in a moderating growth environment.
  • We believe current valuation of c.1.1x FY20F BV is inexpensive.
  • See UOB Share PriceUOB Target PriceUOB Dividend History.

We currently have a HOLD call on OCBC (Target Price S$11.50).

  • Near-term merger and acquisition (M&A) opportunities could continue to weigh on OCBC (SGX:O39)’s near-term share price performance. We are also cautious on OCBC’s non-performing asset (NPA) coverage which is the lowest amongst peers, as well as its slower loan growth outlook. However, should there be no impending M&A, any increase in dividend payout ratio given its high CET1 ratio post scrip dividends would be viewed positively.
  • See OCBC Bank Share PriceOCBC Bank Target PriceOCBC Bank Dividend History.

Key risks

Asset quality trend reversal.

  • While new NPL formation has ticked up slightly, Singapore banks’ asset quality remains relatively benign and NPL ratio remains low at c. 1.5-1.6%. A larger-than-expected NPL arising from non-systemic and/or systemic sectors could indicate that there is risk that the local economy is slowing faster-than-expected, and posing as risk to earnings should credit costs continue to rise. Based on our sensitivity analysis, every 5-bp uptick in credit costs may negatively impact sector earnings by c. 2.5%.
  • We continue to keep watch on the Hong Kong situation; Singapore banks have since provided more clarity on their exposure to Hong Kong (see Singapore banks: Greater China exposure section in attached PDF report for details).

NIM under pressure.

  • According to our sensitivity analysis, every 25-bp cut in interest rates will reduce FY20F NIM by 2- 3bps, and lower earnings by 1.1-2.3%. Therefore, every 10- bp change in NIM will impact the banks’ FY20F bottomline by 6-8%. We believe there is downside risk to SIBOR. If rate cuts are steeper than expected (market is currently pricing in Fed cuts to be on hold), this would put NIM under further pressure.

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, any trade diversion flows may bolster cross-border loan growth in the Southeast Asian region in the longer term.

See attached 20-page PDF report for complete analysis on Singapore Banking sector.

  • More in the attached PDF report:
    • Singapore Banks: Greater China exposure
      • More clarity on Hong Kong exposure; keep watch for vulnerabilities;
      • Potential downside risks from Hong Kong;
      • Impact of Greater China slowdown.

Rui Wen LIM DBS Group Research | https://www.dbsvickers.com/ 2019-12-03
SGX Stock Analyst Report NOT RATED MAINTAIN NOT RATED 99998.000 SAME 99998.000