Singapore Banks - CGS-CIMB Research 2020-02-23: Bracing For Covid-19 Impact

Singapore Banks - CGS-CIMB Research | SGinvestors.io DBS GROUP HOLDINGS LTD (SGX:D05) OVERSEA-CHINESE BANKING CORP (SGX:O39) UNITED OVERSEAS BANK LTD (SGX:U11)

Singapore Banks - Bracing For Covid-19 Impact

  • FY20F will see credit costs ticking higher (single digit impact for now) due to Covid-19, but macro overlays made for HK/US-China cushions the blow.
  • Wealth and treasury income to be key earnings driver amid lower rates. Lower CTIs will help, but revenue headwinds and digital spend may cap this.
  • NPLs may creep up as cashflow disruptions of virus-impacted businesses come through, but raised DPS at all 3 banks limit downside to share prices.
  • Reiterate Overweight. DBS (SGX:D05) is our preferred pick for having least exposure to consumer segments at risk to virus (c.S$2bn). 14% CET-1 supports dividend.



We deem c.2% revenue impact manageable; credit costs a wildcard

  • All ears were on the banks’ outlook for FY20F in light of the recent virus outbreak. Banks guided for revenue to be affected by c.2%, which we think is relatively manageable, but the wildcard lies in the credit cost impact.
  • DBS (SGX:D05) and OCBC Bank (SGX:O39) expect just several bps in incremental impairments due to Covid-19, while UOB (SGX:U11) pushes full-year guidance up to 25- 30bp (FY19: 16bp). Working backwards, this implies that the banks are estimating a net effect of c.10-25bp of provisions solely for the outbreak.
  • However, previous macro overlays made for the US-China tensions and HK uncertainties should offset some of this impact. For OCBC, the absence of sizeable O&G provisions in FY20F (about two-thirds of total FY19 provisions) should keep headline credit costs relatively stable.


NIMs likely to narrow by c.5-7bp in FY20F

  • NIM expansion peaked in 2Q19, before declining 2-5bp over 2H19 on the back of three Fed rate cuts. In FY19, OCBC performed the best with +7bp y-o-y; UOB’s was weakest at - 4bp y-o-y.
  • As regional central banks look set to cut rates further into FY20F, the banks caution for y-o-y NIMs to narrow a further 5-7bp. We think that most of the compression should filter through in 1H20F, before normalising as funding cost savings catch up with falling yields.
  • We note the strength in S$ rates as a benchmark in how quickly NIMs compress; SIBOR has been rather resilient – it has fallen by only 28bp since end-Jul 19 (first of three Fed rate cuts) while 3MLIBOR dipped 55bp.


Sector inexpensive; strong capital is a buffer against NPL risks

  • Sector valuations are attractive with both OCBC and UOB trading at 1 s.d. below mean and DBS trading just above mean. Slower RWA growth amid the weaker regional growth outlook and dampened investment appetite bode well for capital levels, providing dividend visibility.
  • However, we caution that excessive capital (above c.15% CET-1) could be a hindrance to ROE. To this end, OCBC has the highest ratio among SG banks at 14.9%. Although its dividend policy was revised to being progressive with performance, the high capital buffer gives rise to M&A risk.
  • Cash flow disruption from businesses affected by Covid-19 is a key downside risk to the sector, but we think that the c.5% yields will cap share price downside.






Andrea CHOONG CGS-CIMB Research | LIM Siew Khee CGS-CIMB Research | https://www.cgs-cimb.com 2020-02-23
SGX Stock Analyst Report ADD MAINTAIN ADD 27.090 SAME 27.090
HOLD MAINTAIN HOLD 11.64 DOWN 11.940
ADD MAINTAIN ADD 28.39 DOWN 29.100



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