Singapore Banks - RHB Invest 2019-12-03: 2020 Earnings To Be Driven By Non-Interest Income

SGinvestors.io

DBS GROUP HOLDINGS LTD (SGX:D05) OVERSEA-CHINESE BANKING CORP (SGX:O39) UNITED OVERSEAS BANK LTD (SGX:U11)

Singapore Banks - 2020 Earnings To Be Driven By Non-Interest Income

• Maintain NEUTRAL on the banks under our coverage (SG Banks). Our forecast of a flat 2020 vs 2019’s numbers – when combining the net profits of the three banks – points to such a stance. 2020 total income should mainly be from non-II (including wealth management), whilst NII is seen to be flattish, given SG Banks’ management teams’ guidance for a NIM squeeze and soft loan growth.
• Our sector Top Pick: UNITED OVERSEAS BANK (UOB, SGX:U11).

2020 NIM squeeze for SG Banks vs 2019.

• The management teams of the 3 banks – UNITED OVERSEAS BANK (UOB, SGX:U11), OVERSEA-CHINESE BANKING CORP (OCBC, SGX:O39), and DBS GROUP HOLDINGS (SGX:D05) – guided for 2020 NIM to be narrower than 2019’s, a consequence of the falling interest rate environment.
• We forecast 2020 NIM squeeze of between 4bps and 7bps for the three banks – this factors in a falling SIBOR and recent competitive home mortgage rates, which will lower the lending yields for the banks.

Moderate loan growth of mid-single digits seen in 2020.

• SG Banks averaged 3Q19 loan growth of ~5% y-o-y, with business loans growth offsetting home mortgage weaknesses. The management teams of the three banks guided for mid-single-digit 2020 loans expansion, which factors in the global economic uncertainties. We forecast an average of 3.5% in 2020 loans expansion for SG Banks.
• Overall, the three are forecasted to record flat 2020 NII.

Wealth management shows promise.

• We are optimistic on the wealth management businesses continuing to expand through 2020 – this is on the growing franchises and inflow of foreign funds, including from Greater China. All the 3 banks reported 3Q19 wealth management fee strength, with y-o-y growth rates of between 11% and 38%.

Greater China exposure could raise provisioning risks.

• All 3 banks have loans exposure to Greater China. Whilst 3Q19 asset quality for this region remains high, further uncertainties may lead to increases in NPLs. Amongst the banks, UOB has the least percentage of loans exposure to Greater China (16%), whilst DBS has the highest at 30%. We believe a lower exposure minimises asset quality risks at this juncture.

UOB our Top BUY:

• UOB our Top BUY. The SGD29.50 Target Price is based on GGM-derived 1.26x 2020F P/BV. 3Q19’s ROE of 11.8% was higher than 2018's 11.3%. Our valuation for the bank is based on a long-term ROE assumption of 12.7%. This yields a 2020F target P/BV of 1.26x from which we derive our target price.
• UOB is attractive, as its current 1.1x 2020F P/BV is lower than the 1.22x 6-year average.
• Downside risks to our forecasts include higher impairment charges and a sharper fall in the US federal funds rate, which could dampen NIM.
• Upside risks include stronger earnings from a better-than-expected resolution of the US-China trade war.

Leng Seng Choon CFA RHB Securities Research | https://www.rhbinvest.com.sg/ 2019-12-03

SGX Stock Analyst Report NEUTRAL MAINTAIN NEUTRAL 25.800 SAME 25.800

NEUTRAL MAINTAIN NEUTRAL 11.500 SAME 11.500

BUY MAINTAIN BUY 29.500 SAME 29.500