OVERSEA-CHINESE BANKING CORP (SGX:O39)
DBS GROUP HOLDINGS LTD (SGX:D05)
UNITED OVERSEAS BANK LTD (SGX:U11)
Singapore Banks - Defensive In 2020
Stable fees & NIM upside sets the stage for 2020E
- 10-years ago, trading & investment securities contributed over half of non-interest income (NI) for Singapore banks. By 9M19, this has shrunk to 44%, with fee income taking its place. This post-GFC structural change should improve visibility of NI going forward.
- Add to this an extra layer of stability with fee origination largely being driven by wealth management and retail. The sector’s increasing retail focus on both interest & non-interest income should keep credit charges in better check than wholesale heavy banking systems regionally, we believe.
- Together with the potential for NIM upside surprise from flat interest rates in 2020E, we remain Positive on the sector with UOB (SGX:U11) and DBS (SGX:D05) as preferred picks.
Better non-interest income visibility
- While 9M19 did see a higher proportion of trading and investment securities, this was driven off the US Fed decision to lower interest rates following several years of hikes. This resulted in gains from yield squeeze in investment security holdings. We expect fee income contribution to pick up pace given the latest FOMC decision to keep interest rates flat in 2020E.
- In 9M19, we estimate around 60% of fee income originated from wealth and retail segments. Increasingly, we believe this segment should drive fee growth.
- Several factors will contribute in the medium term. The move to strengthen private banking franchises amongst the local banks will be a determining factor. Singapore’s AAA credit rating, strong banking regulations, stable macro will continue to attract private banking AUM from the region as well as other offshore hubs, in our view.
- Private wealth AUM for DBS and OCBC (SGX:O39) has grown at a 15% CAGR in 6-years. We expect continued growth in this segment. Media reports state that DBS plan to grow AUM by 7-8% annually till 2023, while OCBC and UOB are expanding their wealth offerings regionally. Some of the key initiatives by these banks include:
- DBS looking to grow their AUM to SGD300bn by 2023;
- Expansion targets for DBS include Indonesia while also continuing to strengthen their North Asian presence;
- In Thailand, DBS plans to double AUM to SGD8bn by 2023 together with joint offering from DBS Vickers Securities;
- OCBC is expanding private wealth in Malaysia, Middle East and Europe through their Bank of Singapore franchise.
- In the near term, we observe overseas lending for private banking transactions, such as overseas property purchases is also picking up (ACU consumer loans +9% y-o-y in October). These activities together with higher yield seeking, and a hunt for safe havens from volatility in HK, and other macro uncertainties should continue to drive wealth management/retail fees forward in 2020E, in our view.
- This mix of retail and wealth management fees should provide better visibility and stability to sector non-interest income going forward, in our view.
Retail shift to allow for better NPL management
- Retail/wealth banking delivered 33% of sector PBT in 9M19 vs 23% in 2013. Whereas the wholesale banking share fell 14ppts to 44% during the same period.
- The Singapore banks have been strategically moving business focus towards retail/wealth management post-GFC which accelerated since 2013.
- Concurrently, they have been “premiumizing” wholesale banking exposure to segments with higher credit ratings. This has resulted in improved ROAs in retail/wealth management, while also arresting the declining returns in the wholesale banking segment.
- We believe this shift towards retail/wealth management should result in better NPL management in this cycle. Our analysis shows retail NPLs remain significantly lower vs. wholesale NPLs during a banking cycle. Between 2008-2018, retail NPLs were 106bps lower compared to wholesale NPLs.
- We observe that credit charges also experience significantly lower volatility for retail lending vs wholesale through a cycle. Between 2008-2018 (which includes the GFC), retail/wealth management credit charges ranged in a tight band of 35bps. Whereas wholesale lending saw a credit charge spread of 99bps – nearly 3x higher.
- As we head in to 2020E with continued uncertainty from the US-China trade war, unrest in HK as well as macro slowdown across key markets, we believe the Singapore banks should be better positioned to deal with deteriorating asset quality. Even in a scenario of deteriorating asset quality, we believe these banks should see lower downside risks compared to regional peers who have business mixes biased towards wholesale lending.
Defence with a chance of upside surprise
- In their final FOMC meeting for the year on 10-11 December 2019, the US Fed indicated a pause in lowering the Fed funds rate in 2020E. This is different from Street (and MKE) expectations of further cuts. The expected pause in falling Fed rates in 2020E, may potentially provide upside surprise to tightening NIM expectations for the sector as SIBOR will likely level off.
- Our sensitivity analysis shows that a 1bps increase in NIMs should result in a 0.7%-0.8% rise in sector PBT. UOB should benefit the most with a PBT increase of 0.8%.
- Even without a NIM uplift, the Singapore banks offer the highest defensible 2020E dividend yields in SE Asia at a valuation materially cheaper than regional peers. See DBS Dividend History; OCBC Bank Dividend History; UOB Dividend History.
- Increased uncertainty in the regional macro environment and potential for rising NPLs should drive interest towards higher earnings visibility and dividend defensibility over growth, in our view. As a result, we remain Positive on the Singapore banks.
- Our top pick is UOB. We believe their history of conservative balance sheet management in past cycles provides comfort in the current cycle. Indeed, we observe that UOB has seen less NPL growth volatility in the cycle post-GFC than the rest of the sector. Strong capital levels and provisions add to this.
- See
Thilan Wickramasinghe
Maybank Kim Eng Research
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https://www.maybank-ke.com.sg/
2019-12-16
SGX Stock
Analyst Report
11.260
SAME
11.260
29.920
SAME
29.920
30.500
SAME
30.500
