Singapore Banks - OCBC Investment 2020-01-16: Guidance Looks On Track

Singapore Banks - OCBC Investment Research | SGinvestors.io UNITED OVERSEAS BANK LTD (SGX:U11) DBS GROUP HOLDINGS LTD (SGX:D05)

Singapore Banks - Guidance Looks On Track

  • Following easing trade tensions, a shift in consensus interest rate expectations to a pause in Federal Reserve rate cuts and recent news-flow surrounding digital licenses applicants in Singapore, we met up with the management teams of DBS and UOB for a sector update earlier this month.
  • The upcoming 4Q19 results (DBS - 13th February, UOB - 21st February) should see the sector meet the bulk of their prior guidance provided although cost income ratios may be seasonally higher due to year end factors such as lower trading income as activities moderate.

The growth outlook for Singapore banks in 2020 is expected to remain modest.

  • Sector earnings growth is forecast to be largely flat, with ~4-5% loans growth and stable asset quality trends expected.
  • A key driver for bank sector earnings remains net interest margin (NIM) direction, which is unsurprising since two-thirds of banks’ total income is derived from net interest income. While the sector’s net interest margin should continue to reflect the lagged pass-through from last year’s Federal Reserve interest rate cuts in the upcoming quarters, concerns over NIMs compression may ease later this year assuming the current base case of a pause in Federal Reserve interest rate remains unchanged.
  • Non-interest income growth momentum has been a silver lining supporting the bottom line for the sector, and is projected to continue aiding growth this year. Asset quality trends remain benign (sector NPL ratios ~1.5-1.6%) with stress tests results suggesting unremarkable risks, while banks are watchful for gradual deterioration in credit quality and have guided for small uplift in credit costs as the cycle develops.
  • Another reason supporting our constructive stance is the solid capital positions of the sector. Dividends are expected to be stable as banks continue to deliver modest loan growth and maintain asset quality, translating to an average ~5% forward dividend yield, and help provide downside support for Singapore banks although further comments could be made on the possibility of higher capital payout given high capital ratios. As of end September 2019, CET1 ratios of DBS and UOB are 13.8% and 13.7% respectively, above previous indications of optimal range of 12.5% to 13.5%.

Singapore Banks Valuations

  • Valuations wise, Singapore banks last trade ~1.2x price/book, in line with the sector’s past ten-year historical average multiple, which is not demanding. While we expect share price returns of DBS and UOB to track more closely with each other this year given easing concerns over further NIM compression and a benign asset quality outlook, we maintain the relative preference for UNITED OVERSEAS BANK (SGX:U11) over DBS GROUP (SGX:D05) as the former trades at cheaper valuations, is estimated to have relatively smaller interest rate sensitivity to lower short term rates and offers a more diversified loan book through its strategic focus on ASEAN economies (Greater China made up ~16% of UOB’s 3Q19 total loans, vs. ~28% for DBS).
  • Following last July’s announcement from the Monetary Authority of Singapore (MAS) that it will issue up to 5 new digital bank licenses to non-bank players who can add value to the economy, there have been 21 applications received, with results expected mid-year. Reportedly, eight of these 21 digital banking applicants (7 for digital full bank, 14 for digital wholesale bank) intend to focus on the under-banked segments in Singapore which includes lower income segments, early income millenials starting their careers, start-ups and very small/micro-SMEs.
  • We see fairly limited near-term impact for Singapore banks which operate in an already well-banked, mature market with high existing competition (World Bank estimates Singapore’s banking penetration at 98%, even higher than US’s 93% and global average of 67%). The incumbents’ continued investments in their digital efforts, with the regulators’ phased-in approach and strict controls for the roll out of digital full banks (DFBs) should mitigate concerns of intense competition.

Summary of management comments – Guidance looks on track


  • Following the 3Q results, UOB had shared their assumptions in 2020 for 2 Federal Reserve rate cuts and a NIM contraction of around 5-10bps, and a narrower NIM contraction of around 0-5 bps in the potential scenario of no Federal Reserve rate cuts.
  • Dividend payout ratio is expected at 50% assuming CET1 ratio maintained above 13.5% (13.7% as of end September 2019), with the payment frequency likely to be maintained at half-yearly basis. Following the interim 1H19 dividend per share (DPS) payment of 55 Scts/share, upcoming final DPS is forecast at 65 Scts/share. See UOB Dividend History. Assuming common equity tier 1 (CET1) ratio is maintained above 13.5%, management expects dividend payout ratio at 50%. We expect this CET condition to be met as UOB should continue to build capital next year with a return on equity (ROE) still in the low teens and loan growth of 4-5%.
  • Expect low-to-mid single digit loan growth in 2020 with some pressure to NIM. In a lower growth environment, competition pressures should remain potentially in the higher tier corporate and mortgage segments. UOB targets 42% cost income ratio by 2021.
  • Asset quality looks benign, but management expects a potentially weaker macro environment to translate into higher stage 1 and 2 provisions potentially. The new expected credit loss (ECL) method of provisioning coupled with UOB’s prudent internal standards could also lead to a potential uptick in credit costs from Hong Kong.
  • Its strategy of diversifying in Southeast Asia (SEA) and making money from China (versus in China) should help mitigate risks in a slowing environment. Its current Greater China exposure is also smaller compared to peers, with half of its HK exposure being trade finance (shorter duration, provides flexibility to be more nimble and to cut renewals if the situation warrants). Within SEA, Thailand and Vietnam should see stronger growth for UOB. The bank has been seeing more interest from investors and corporates looking to diversify in these two countries in the wake of a supply chain re-thinking.
  • UOB's 4Q19 earnings reports: 21 February 2020. See UOB Announcements.
  • See UOB Share Price; UOB Target Price; UOB Analyst Reports; UOB Latest News.


  • 4Q19 results should meet expectations - Management updated that prior guidance remains on track: FY19 full year expectations of NIM ~1.88% (implying 4Q NIM at around 1.86%, vs 1.9% in 3Q), loan growth of 4%, stabilisation of housing loans supported by acceleration in bookings, growth in non-trade corporate loan). Fee income growth is tracking in line with low double digit expectation. Cost income ratio should be higher in 4Q due to seasonally lower trading income (potentially towards 45% for 4Q, vs 43% for full year and 42% in 9M19). Asset quality remains benign, SPs should end the year around 19-20bps.
  • While discussions are ongoing internally on dividend policy, management guidance for DPS of 30 Scts/quarter is unchanged. See DBS Dividend History.
  • 2020E NIM target of 1.80% was predicated on 1 rate cut expected in June 2020. This view has been updated in our recent meeting this month. Management acknowledges there is potential upside risks for NIM this year, given latest Federal Reserve dot plot is for no rate cut. In discussions following 3Q results late last year, management had guided for ~7bps compression based on their expectation of an additional Federal Reserve rate cut in June 2020, while DBS’ NIM fell the least within the sector (-1bp q-o-q).
  • Modest 2020 expectations, bulk of loans growth should come from corporates – Single-digit earnings growth in 2020 driven by double digit growth in non-interest income. Treasury income guidance was raised from SGD200mn to SGD240mn per quarter. Asset quality outlook looks stable, expect credit cost to be stable year on year. Fee income is likely to grow double digit in 2020, with similar drivers as 2019 such as wealth management and credit cards. Loans growth momentum should be maintained at around 4%. Provisions should be flat in 2020 (20bps credit cost guidance vs 25bps normalised levels).
  • Cost to income ratio should be similar year on year, with continued spending on digital channels while looking to reduce size and number of branches in Singapore to reduce rental costs. Management believes more efficiency gains could be achieved as it continues to invest in digital platforms and deliver new product suites and tools to customers. Currently it is looking at mobile platform digitalisation in Indonesia and exploring innovative partnerships with major non-bank domestic corporates.
  • Limited impact from HK’s social unrest – Has seen an increase in client enquiries on account openings, but immaterial fund inflows to date. Hong Kong (HK) loans exposure is also not a concern given the bulk is made up of cross border trade funding with China based MNCs which is not exposed to more vulnerable segments such as HK retail, DBS continues to have a positive strategic long term stance on the region and views that risks remain manageable given that mortgages makes up a minimal ~6% of the overall HK loan book and some general provisions have been made in 3Q19 pre-emptively. More importantly, the majority of the HK-booked loans exposure were made to larger corporates, some of which are companies doing businesses in China but whose entities are incorporated in Hong Kong.
  • On the topic of threat from fintechs and digital banks licenses in Singapore, DBS is looking to collaborate and keep up with technology investments – On fintech, DBS is looking to build up an ecosystem of partners they can provide services to and support, leveraging on access to their customer base. A potentially larger impact on existing players may be expected from digital licenses issuances if two conditions exist:
    1. significant under-served population or customer segment,
    2. fundamental mis-pricing in the system, which management does not see in the domestic banking scene.
  • Overall, DBS believes it currently has a digital lead in servicing the masses and intends to maintain it, following work to remove much of the pain points for customers over the past years through technological enhancements. It is also focused on offering digital solutions to its corporate customers. As the competitive environment continues to heat up, the bank’s digital investment spending will continue to be high to maintain its competitive edge, which implies cost income ratio will be largely maintained in 2020.
  • DBS's 4Q19 earnings reports: 18 February 2020. See DBS Announcements.
  • See DBS Share Price; DBS Target Price; DBS Analyst Reports; DBS Latest News.

OCBC Research Team OCBC Investment Research | https://www.iocbc.com/ 2020-01-16
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