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

Banking – Singapore - UOB Kay Hian Research | SGinvestors.io 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.
  • Maintain OVERWEIGHT.



The tide has turned with uncertainties on outlook for banks abating across various fronts:


Geopolitical headwinds have subsided.

  • 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.

A pause to cuts in interest rates.

  • 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.

Manageable impact from digital-only banks.

  • 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’s growing stature as a key financial hub.

  • 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.

Earnings outlook: Flat in 2020, recovery in 2021.

  • 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.


Maintain OVERWEIGHT.

  • 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 (SGX:D05) (Rating: BUY/ Target Price: S$30.00).


OCBC (SGX:O39) (Rating: BUY/ Target Price: S$14.45).


UOB (SGX:U11) (NOT RATED).


See attached 30-page PDF report for complete analysis.






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



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