Singapore Banks - DBS Research 2020-02-03: Expect A Moderated 4Q19


Singapore Banks - Expect A Moderated 4Q19

  • A moderated 4Q19 is expected with lower q-o-q earnings (higher y-o-y due to low-base effect from 4Q18 which saw lower earnings weighed by non-interest income).
  • NIM to see continued pressure on decline in loan yields; loan growth likely to remain largely flattish.
  • Wealth and trading incomes are expected to be weaker q-o-q on seasonality effects.
  • UOB (SGX:U11) continues to be our preferred pick; possibility of OCBC (SGX:O39) increasing dividends.

NIM continues to see pressure.

  • In 4Q19, average 3MSIBOR declined c.12bps (3Q19: c. 5bps decline) q-o-q as 3MLIBOR declined 27bps q-o-q (3Q19: 31bps decline). We believe that loan yields will continue to see decline on a lower reference rate.
  • Going forward, with 3MSOR correcting c.54bps from its peak in May 2019, we believe there is further downside to 3MSIBOR which has corrected by only c.27bps to 1.73%. Our base case is that Fed is likely to take a prolonged pause on the easing cycle.

Margins continue to face competition.

  • As banks continue to take on a more conservative stance amidst a slowing economy, flight to quality loans may also put pressure on loan yields. Further, according to our channel checks, the mortgage market continues to see competition as banks continue to defend their respective market shares against a declining mortgage market.

Cost of funds to come off, albeit slower than loan yields.

  • Compared to 4Q18, SGD fixed deposit rates have come off by c.30-40bps. We believe lower cost of funds may buffer some of the declines in loan yields but continue to expect NIM to come off.
  • Recall that in UOB’s case, the bank had taken the tactical decision to hold additional liquidity in 3Q19 to avoid competition towards year-end. Hence, we expect UOB’s NIM to be flattish in 4Q19 with peers seeing some NIM decline.

NIM sensitivity: Every 10-bp decline in NIM has a 6-8% impact on net profit.

  • Our sensitivity analysis indicates that every 25-bp decline in interest rates that reprices the S$, HK$ and US$ books collectively would result in NIM decline of c.2-3bps with a corresponding 1.1-2.3% decline in net profit across the Singapore banks. Every 10-bp decline in NIM has a 6-8% impact on net profit.
  • OCBC and UOB are less sensitive to NIM declines due to their funding tructure.

Loan growth likely to end the year within guidance.

  • As of 9M19, DBS (SGX:D05), OCBC and UOB saw year-to-date loan growth of 2.5%, 2.0%, and 5.1% respectively. Singapore system loans grew 4.2% y-o-y in 2019. This is below our expectations of c.5.0%. After expanding 0.7% in October and November 2019, loans declined 0.5% m-o-m in December 2019.
  • We believe loan growth for FY19F will be within their respective guided figures: OCBC has guided for a low single-digit loan growth while the other banks have guided for a mid-single-digit loan growth. OCBC and UOB is likely to see flattish loan growth for 4Q19.

Continue to keep watch on mortgage book.

  • For the 112h consecutive month, Singapore banks’ mortgage book continued to decline m-o-m. In December 2019 (-0.1% m-o-m), the rate of decline since September seemed to have slowed from the peak of 0.3% m-o-m decline seen in April 2019. Accordingly, transaction values in 3Q19 and 4Q19 for primary sales reversed from y-o-y declines in previous quarters – we expect to see some of the new bookings being translated into mortgage drawdowns subsequently. Y-o-y declines for secondary sales in 3Q19 and 4Q19 also narrowed from peak declines of c. 45-50% y-o-y since the cooling measures were implemented. We believe the crux to mortgage growth lies in the secondary refinancing market.

Wealth AUMs likely to continue increasing on the back of inflows.

  • As Singapore banks continue to build on their wealth management business, AUMs have been seeing high single-digit growth in assets under management (AUMs) post acquisitions. We believe that a healthy increase in net new money will continue to bolster overall AUMs, which is a function of net new money as well as underlying market values of investments.
  • Wealth and trading income are expected to be weaker q-o-q on seasonality, higher y-o-y due to low-base effect. The fourth quarter is typically a slower quarter due to less market and client activity. We expect wealth and trading income to be weaker q-o-q in 4Q19 and higher y-o-y on low-base effect. Recall that 4Q18 was impacted by challenging markets which impacted both wealth management and trading income across the ingapore banks.

9M19 saw non-systematic new NPA formation; credit costs for full year likely to end within guidance.

  • Singapore banks saw non-systematic new NPA formation across 9M19. In 2Q19, OCBC and UOB’s new NPL formation of S$390m and S$357m were largely attributed to the Indonesian CPO portfolio and US real estate-related exposure respectively, though no special provisions were required then. In 3Q19, OCBC and DBS saw new NPL formation of S$683m and S$367m, from two corporate accounts in transportation and offshore vessels, and a transportation account respectively.
  • Barring any unexpected large corporate new NPA formation and with the exception of OCBC which has written additional allowances on its oil and gas portfolio in 1Q19 and 3Q19 as well as other new NPA formation, we believe credit costs for the full year are likely to end at the lower end of/below the banks’ respective guided figures as asset quality continues to be relatively benign.

Look out for pockets of weakness.

  • As the US-China trade tensions continue, we believe smaller SMEs further down the trade supply chains are more vulnerable. We will continue to keep watch on SME loan books, on top of risks arising from exposure to Hong Kong due to the ongoing protests, where OCBC may have relatively larger SME exposure compared o its peers.

Possibility of OCBC increasing dividends?

  • As of 3Q19, OCBC’s CET1 ratio at 14.4% was the highest among its peers (DBS: 13.8%, UOB: 13.7%), beyond its optimal range of 12.5-13.5%, with lowest dividend payout ratio of c.45% among its peers. Upon adoption of IRB for WHB towards end-2020 pending regulatory approval, there is more scope for OCBC’s CET1 ratio to improve arising from potential RWA reduction.
  • As management has retained capital while considering inorganic opportunities, we believe there is possibility of OCBC increasing its dividend payout ratio to be more in line with peers’ c.50%.

Valuation and Recommendation

Asset quality the wild card.

  • Singapore banks are now trading at c.1.0-1.3x FY20F BV. We believe that Singapore banks may be a beneficiary should liquidity flow into Asia. Valuations would also be supported by strong capital levels and decent dividend yields in view of heightened uncertainties arising from the trade war and investors’ search for yields, should asset quality continue to hold up against slowing global growth.

UOB our preferred pick.

  • We continue to like UOB (BUY, Target Price S$29.20) as a defensive pick for
    1. its attractive dividend yield of c. 4.7%,
    2. smallest exposure to Greater China among the local banks and a more defensive wealth management franchise as UOB continues to navigate cautiously in a moderating growth environment.
  • We believe current valuations of c.1.1x FY20F BV remain inexpensive. We currently have a HOLD call on OCBC (Target Price S$11.50) as we believe that there is a lack of catalysts for its share price.

Key risks

Slower-than-expected loan growth.

  • A technical recession in Singapore, breakdown in US-China trade talks, disappointing macro indicators, a worse-than-expected outbreak in Wuhan virus in Singapore and regionally and a less firm macroeconomic outlook going forward could temper our loan growth expectations. Although loan growth is less sensitive to earnings, any deceleration as a result of weaker sentiment would dent top-line prospects.
  • A sharper-than-expected slowdown in the Singapore property market will cause mortgage books to shrink faster. However, we remain watchful that any trade diversion flows may bolster cross-border loan growth in the Southeast Asian region in the longer term.

Asset quality trend reversal.

  • A larger-than-expected NPL arising from generic sectors and/or worsening Hong Kong outlook, as well as a worse-than-expected outbreak in Wuhan virus regionally which will affect tourism and retail businesses could unwind expectations of credit cost and NPL declines, thus posing risks to earnings.
  • Based on our sensitivity analysis, every 5-bp uptick in credit costs may impact sector earnings by c. 2.5%.

NIM pressures.

  • According to our sensitivity analysis, every 25-bp cut in interest rates may have an impact of 1-3bps on NIM for FY20F, while every 10-bp change in NIM has a 5-7% earnings impact on banks’ FY20F bottom line. Should there be more rate cuts than expected (the market is currently pricing in no Fed cut in FY20F), NIM pressures will adversely affect earnings.

Rui Wen LIM DBS Group Research | https://www.dbsvickers.com/ 2020-02-03
SGX Stock Analyst Report NOT RATED MAINTAIN NOT RATED 99998.000 SAME 99998.000