Singapore Banks - UOB Kay Hian 2020-01-03: Headwinds From Uncertainties Have Receded; Fragile Optimism For Recovery On The Mend

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

Banking – Singapore - Headwinds From Uncertainties Have Receded; Fragile Optimism For Recovery On The Mend

Geopolitical risks from the escalation in trade conflict and hard Brexit are subsiding, which will lead to a gradual recovery in business confidence. A further fall in NIMs would be arrested by the stabilisation in interest rates after three “insurance” cuts in the Fed funds rate.
We expect NIMs to stabilise starting 2H20. We also expect the impact from new digital-only banks to be manageable as an omni-channel approach is required to meet customers’ multi-faceted needs.

The US and China have reached an agreement on a Phase 1 trade deal that encompasses purchases of agricultural products, intellectual property, financial sector liberalisation, enforcement and foreign exchange policy. Signing is scheduled on 15 Jan 20. The Conservative Party’s landslide victory during the General Election in Dec 19 has given PM Boris Johnson a strong mandate to get the Brexit done. The ebbing of geopolitical risks can be observed from the recent strengthening of the renminbi and pound.

Interest rates are on hold after the FED completed a series of three insurance rate cuts in 2H19. The current stance in monetary policy is seen as appropriate. The Federal Open Market Committee (FOMC) foresees “uncertainties about outlook” being reduced. FOMC participants expect interest rates to remain unchanged in 2020. We expect NIMs to stabilise in 2H20. Net interest income should be flat in 2020 but resume usual expansion in 2021F.

Banks must adopt an omni-channel approach to effectively engage customers digitally and through physical interactions. While 80% of all touchpoints occur digitally, only 25% of sales are closed through digital channels. Singapore banks are digitally savvy. They are prepared to meet increased competition having embarked on digital transformation since 2014.

Singapore is ranked the second most competitive wealth management centre globally. It is the largest foreign exchange centre and the second largest interest rate derivative centre in the Asia Pacific region. Preserving political and social stability and continuous effort to equip finance professionals with new capabilities would help Singapore move up the league table as a financial hub.

We foresee flat earnings for 2020. However, business confidence is on the mend as geopolitical risks subside.
We expect earnings growth to pick up to 7.3% for DBS and 6.6% for OCBC in 2021F, driven by:
1. stronger loan growth of 5.5%,
2. stable NIM,
3. continued high-single-digit growth in fees, and
4. slight moderation in credit costs.

Banks are yield plays. DBS and OCBC provide attractive dividend yields of 4.6%, which differentiate them from regional peers. We see their dividend payout ratios as sustainable due to Singapore banks’ robust CET-1 CAR.

DBS is a prime beneficiary of the Phase 1 trade deal between the US and China as Greater China accounted for 27.4% of total income in 9M19. DBS is the clear leader in digital transformation having been recognised as the World’s Best Digital Bank by Euromoney twice in 2016 and 2018.
Our base case 2020F DPS is S$1.20 but we see potential upside for the best case of S$1.32.
See DBS Share Price; DBS Target Price; DBS Analyst Reports; DBS Dividend History; DBS Announcements; DBS Latest News.
See company update: DBS Group - Clear Leader In Digital Transformation.

OCBC plans to further expand in the Greater Bay Area (GBA) and targets to double PBT from GBA to S$1b by 2023, representing a 5- year CAGR of 11%. It intends to increase its stake in Bank of Ningbo (BON) to above 20% if the banking sector is liberalised to allow greater foreign participation.
Our base case DPS for 2020F is S$0.50. Potential upside for an increase in dividends is limited as we estimate dividend payout ratio stretched at 47.7% for 2020F, which is at the higher end of its policy of 40-50%.
See OCBC Bank Share Price; OCBC Bank Target Price; OCBC Bank Analyst Reports; OCBC Bank Dividend History; OCBC Bank Announcements; OCBC Bank Latest News.
See company update: Oversea-Chinese Banking Corporation (OCBC) - Ample Capital Buffer, Eyeing Expansion In China.

UOB benefits from intra-regional trade and investments between Southeast Asia and China due to its extensive network within ASEAN. UOB is digitally savvy and has been recognised as the Best Domestic Bank and Best Digital Bank in Singapore and Best Digital Bank in Thailand by Asiamoney in 2019.
See UOB Share Price; UOB Target Price; UOB Analyst Reports; UOB Dividend History; UOB Announcements; UOB Latest News.
See company update: United Overseas Bank - Harnessing Strength Of Extensive Network Within ASEAN.

Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2020-01-03

SGX Stock Analyst Report BUY MAINTAIN BUY 30.000 SAME 30.000

BUY MAINTAIN BUY 14.450 SAME 14.450

NOT RATED MAINTAIN NOT RATED 99998.000 SAME 99998.000