Singapore Banks

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

Singapore Banks - Unwinding The Margin Expansion

We cut NIM forecasts further (10-12bp compression in FY20F) amid the Fed’s 50bp emergency rate cut and its implied assumptions on global growth.
We downgrade DBS and UOB to HOLD, and cut target prices of all banks as we input lower loan growth (c.2%) and higher provisions as Covid-19 turns pandemic.
Downgrade sector to NEUTRAL to factor in revenue headwinds; c.5% yields provide key valuation support.

We prefer DBS for its better track record of margin management, dividend visibility and smaller SME portfolio among peers.

The Fed’s 50bp emergency rate cut on fears of slowing economic growth amid the Covid-19 outbreak expels our expectations of some stabilisation in margins in 2H20F. To this end, we cut our NIM forecasts further for FY20F
- DBS: -12bp y-o-y to 1.77%,
- OCBC: -10bp y-o-y to 1.67%,
- UOB: -10bp to 1.68%
and factor in added pressure from a highly probable 25-50bp rate cut in Mar/Apr’s FOMC meeting (based on Fed Funds Futures) spilling into FY21F’s estimates (4-5bp compression). The resilience in SGD rates may falter.

As the emergency cut was done in response to supply chain disruptions in China as well as the exponential rise in infection cases globally, we believe it is reasonable to pen in lower regional loan growth of 2-3% in FY20F on the broad cautionary stance on business expansion.
Although Jan 20’s industry growth statistics were promising (loan growth +6.3% y-o-y, deposit growth +9% y-o-y), these gains could be short-lived on the back of softer data points such as Feb 20’s PMI of 48.7, which was the weakest since Feb 16.

The banks have so far guided for 4-14bp in incremental credit costs for Covid-19, and outlined 6-10% of their loan books as directly exposed to consumer consumption segments such as aviation, hospitality, F&B, and the likes.
Although Singapore banks err more conservatively in terms of credit quality management when compared to the region, we think NPLs could start to emerge prominently as Covid-19 turns pandemic given the banks’ Greater China exposure (supply chain disruption) and SME portfolios.
We raise FY20F credit costs to c.30bp across the banks as ECL models under IFRS9 necessitate hefty impairments on exposures under monitoring, although not past due nor NPLs.

We think c.5% dividend yields will still serve as a key support factor to banks’ valuations. While counterproductive to increased returns, we like the defensive shield of robust CET-1 ratios of 14.1-14.9% across the banks, providing a substantial buffer against asset quality deterioration.
Catalysts/downside risks are a removal of HK geopolitical uncertainties/sharper Fed rate cuts to combat a prolonged Covid-19 situation.

HOLD, Target Price S$24.33.
The Covid-19 outbreak may impact revenue by 1-2% in FY20F, in our view. Exposures at risk to the virus outbreak amount to c.S$2bn – impairments from this book could amount to 4-5bp if the outbreak dissipates by mid-year 2020.
See DBS Share Price; DBS Target Price; DBS Analyst Reports; DBS Dividend History; DBS Announcements; DBS Latest News.

HOLD, Target Price S$11.05.
OCBC has said it will be offering financial support to both its retail and corporate customers in several regional markets. The measures include a restructuring of mortgages and business loans, a moratorium on principal repayments, and the extension of bridging loans to affected businesses.
See OCBC Bank Share Price; OCBC Bank Target Price; OCBC Bank Analyst Reports; OCBC Bank Dividend History; OCBC Bank Announcements; OCBC Bank Latest News.

HOLD, Target Price S$24.91.
UOB had announced S$3bn in relief assistance to affected SMEs. The support measures include a moratorium on principal repayments for up to one year and extending working capital facilities by up to S$5m.
See UOB Share Price; UOB Target Price; UOB Analyst Reports; UOB Dividend History; UOB Announcements; UOB Latest News.