Singapore Banks 4Q19 Round-up - UOB Kay Hian 2020-02-24: Hikes In Dividends Bring Yield To Above 5%

Singapore Banks - UOB Kay Hian Research | SGinvestors.io

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

Singapore Banks 4Q19 Round-up - Hikes In Dividends Bring Yield To Above 5%

DBS and OCBC registered strong growth in fees of 16.7% and 17.3% y-o-y respectively, driven by growth in wealth management. Their NPL ratios also receded by a significant 13bp and 6bp q-o-q. OCBC surprised the market by hiking final dividend by 22% to 28 S cents.
We expect DBS and OCBC to raise 2020 DPS to S$1.32 and S$0.56 respectively, bringing dividend yield to 5.3% and 5.1%.

Maintain OVERWEIGHT. BUY DBS (Target: S$28.00) and OCBC (Target: S$12.68).

WHAT’S NEW

DBS (SGX:D05), OCBC Bank (SGX:O39) and UOB (SGX:U11) reported net profit of S$1,508m (+14.3% y-o-y), S$1,243m (+34.2% y-o-y) and S$1,008m (+10.0% y-o-y) in 4Q19. DBS and OCBC beat our expectations but UOB’s results were marginally below consensus estimate.

Moderation in loan growth.

DBS and OCBC registered moderation in loan growth to 3.7% and 2.7% y-o-y respectively in 4Q19. UOB saw contraction in loans of 2.3% q-o-q as the bank de-risked its balance sheet by trimming exposures to Singapore and North Asia. UOB’s US$-denominated loans and manufacturing loans contracted 11.6% and 15.8% q-o-q respectively.

NIM compression more significant for DBS.

OCBC and UOB registered smaller NIM compression of just 1bp q-o-q in 4Q19. OCBC benefited from NIM expansion of 8bp, 9bp and 29bp q-o-q respectively for Hong Kong, Malaysia and Indonesia. UOB’s shift in loan mix towards high-margin markets, such as Malaysia and Thailand, could have cushioned the fall in NIM.
DBS suffered steeper NIM compression of 4bp q-o-q due to its reliance on Singapore and Hong Kong, where interest rates have fallen more.

Wealth management grew from strength to strength.

DBS and OCBC registered strong growth in fees of 16.7% and 17.3% y-o-y respectively in 4Q19, driven by wealth management (DBS: +31% y-o-y, OCBC: +31% y-o-y, UOB: +42% y-o-y). UOB registered slower growth in fees of 1.9% y-o-y, held back by drop in loans-related fees by 25% y-o-y (disbursement slowed).
DBS, OCBC and UOB expanded AUM by 11%, 15% and 14% y-o-y respectively.

Strong treasury income.

OCBC and UOB recorded strong net trading income of S$316m (+3,411% y-o-y) and S$175m (+48% y-o-y) respectively in 4Q19. Besides benefitting from strong customer flows, OCBC’s net trading income was also boosted by gains from Great Eastern’s shareholders’ fund.

Asset quality improved at DBS and OCBC.

OCBC’s NPL ratio receded a significant 13bp q-o-q to 1.45% in 4Q19 due to upgrades/recoveries and write-offs for accounts in the oil & gas support vessels and services (OSV) sector.
DBS’s NPL ratio receded by 6bp q-o-q to 1.49% due to write-off of S$419m for legacy NPLs.

Resiliency from strong capital adequacy.

OCBC has the highest CET-1 CAR among local banks at 14.9%, boosted by retained earnings and its scrip dividend scheme. DBS and OCBC also have robust CET-1 CAR of 14.1% and 14.3% respectively.

ACTION

Maintain OVERWEIGHT.

Our positive view on Singapore banks rest on their attractive dividend yields of above 5%, which differentiate them from their regional peers. We see dividend paid out as sustainable due to Singapore banks’ robust CET-1 CAR.

BUY for sustainable yield.

Banks’ share prices are likely to suffer bouts of volatilities due to outbreak of COVID-19 during 1H20. We see S$24.00 and S$10.18 as attractive levels to accumulate DBS and OCBC for dividend yield of 5.5%.

SECTOR CATALYSTS

Banks evolving into yield plays.
Outbreak of COVID-19 affects growth and credit costs in 1H20.

ASSUMPTION CHANGES

Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2020-02-24

SGX Stock Analyst Report BUY MAINTAIN BUY 28.000 SAME 28.000

BUY MAINTAIN BUY 12.800 SAME 12.800

NOT RATED MAINTAIN NOT RATED 99998.000 SAME 99998.000

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