Singapore Banks - CGS-CIMB Research 2020-03-04: Unwinding The Margin Expansion

Singapore Banks - CGS-CIMB Research | SGinvestors.io 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.



We expect NIM compression of 10-12bp in FY20F on Fed cuts

  • 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.


Strong loan growth in Jan 20 may not be sustainable

  • 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.


Some uptick in credit costs to 26-30bp (previously 25-29bp)

  • 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.


Downgrade to NEUTRAL; take comfort from robust capital buffers

  • 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.


Singapore Banks


DBS (SGX:D05)


OCBC Bank (SGX:O39)


UOB (SGX:U11)


See also recent SGX Market Updates:





Andrea CHOONG CGS-CIMB Research | LIM Siew Khee CGS-CIMB Research | https://www.cgs-cimb.com 2020-03-04
SGX Stock Analyst Report HOLD MAINTAIN HOLD 11.05 DOWN 11.640
HOLD DOWNGRADE ADD 24.33 DOWN 27.090
HOLD DOWNGRADE ADD 24.91 DOWN 28.390



Advertisement



MOST TALKED ABOUT STOCKS / REITS OF THE WEEK



loading.......



ANALYSTS SAY


loading.......