Singapore Banks - CGS-CIMB Research 2020-03-19: Hold Your Breath


Singapore Banks - Hold Your Breath

  • We cut NIM estimates further (14-15bp compression in FY20) on the back of the 100bp Fed rate cut. We expect S$ rates to recede towards 0.2-0.3%.
  • Vulnerable O&G exposures have been managed downwards since FY17, but we raise FY20F credit costs to c.60bp on Covid-19 pressure on corporates.
  • We upgrade OCBC (SGX:O39) to ADD as we see better value emerging with valuation having retraced to its GFC trough of 0.8x P/BV. Dividend visibility is also clearest.
  • Reiterate Neutral and keep HOLD on DBS (SGX:D05) and UOB (SGX:U11). We cut target prices across banks on lower sustainable ROEs (8-9%), but expect a recovery in FY21F.

NIMs could compress c.15bp in FY20F as S$ rates decline to 0.3%

  • Fears of economic uncertainty amid the virus outbreak prompted the 100bp surprise Fed rate cut. We think a decline in S$ rates towards c.0.2-0.3% is inevitable in the coming weeks, but a potential monetary boost from the MAS via shifting to a neutral policy stance by reducing the slope of the S$NEER policy band to 0% (as done during a technical recession in 2001 and GFC) or by re-centering the band (SARS outbreak in 2003) could provide sustenance for a slower dip of 3MSIBOR. 3MSOR closely tracks benchmark US$ rate movements, and we expect this rate to retrace towards zero, as seen during the previous low rate period in FY09-15. In tandem, we further lower our NIM estimates to pen in a c.15bp compression in FY20F, and a lagged c.10bp in FY21F.

Asset quality likely to weaken but buffers are strong

  • Although the onset of lower oil prices compounds our concerns over delinquencies stemming from virus-related business disruptions, O&G exposures account for a reduced 3-5% of Singapore banks’ loan books.
  • As at 2Q17, DBS had c.S$20bn in O&G exposure – about S$17bn of which were loans (c.5.5% of gross loans). Of the exposure, support services comprised S$7bn where S$1.6bn was extended to state-owned of government-linked shipyards. Of the remaining S$5.4bn, S$2.4bn was to five names and S$3bn was spread over smaller names.
  • As at 3Q19, OCBC’s O&G exposures accounted for c.5% of loans. Recall that the bank had written down these exposures in 1Q19 and 4Q19 to scrap value (c.6% of market value, or 3% if misc. expenses were to be included).
  • UOB’s O&G exposures account for 2-3% of its book. Vulnerable names were classified as NPLs and corresponding collateral values were marked down (by as much as 90%) in 4Q17. Majority of UOB’s O&G exposures are to traders and downstream players comprising state-owned and global groups. We expect minimal impairments stemming from these portfolios moving forward.

We raise credit costs to c.60bp on corporate risks from Covid-19

  • That said, we raise credit cost expectations across the board to factor in the rippling effects of Covid-19 on larger corporates, SMEs, and individuals alike. We think it reasonable to expect higher delinquencies, lower income and a potential spike in unemployment given the increasing number of travel advisories, lockdowns and border closures, and estimate c.60bp in credit costs for FY20F.
  • IFRS9 accounting standards require significantly higher impairments (lifetime ECL) for exposures with increased credit risk; therefore, credit costs are likely to rise much sooner before NPLs start materialising. We keep in mind our bear case of credit costs trending towards c.120bp – as seen during the GFC – if asset values significantly erode.
  • NPA coverage ratios trended lower at 84-87% across the banks compared to 111-125% in 2008 – an indication of probable impairments if need be – but c.14-15% CET1 capital ratios are strong buffers in any case.

Singapore banks are trading at 0.75-0.9x FY20F P/BV

  • We think the banking sector could be market-neutral in the medium term given the c.30% YTD sell-down on the back of multiple Fed rate cuts, lower oil prices and Covid-19 fears.
  • See DBS Share PriceOCBC Share PriceUOB Share Price.

OCBC - Attractive valuation; dividend track record intact

  • We upgrade OCBC (SGX:O39) to ADD from Hold as we see better value emerging given that its valuation has retraced to slightly below its GFC trough of 0.8x P/BV. Although NIM headwinds and virus-related pressures remain, we believe that the attractive valuation and a 6.6% yield more than offset these negative factors. We think dividend visibility is firmest at OCBC – the bank has so far maintained DPS throughout periods of negative profit growth since FY01, although a non-accretive M&A deal is a key downside risk.
  • Further, we found that OCBC Share Price is more resilient than peers over the longer term, and expect this trend to continue. During the GFC, OCBC Share Price declined by a smaller 33% and 7% over the following six and nine months, compared to the 12-41% contraction of its peers over the same time period. We noted a similar trend during the OPEC oil crisis and expect this to recur in the current operating climate. See OCBC Share PriceOCBC Target PriceOCBC Dividend History.
  • We reiterate our HOLD call on DBS (SGX:D05). The bank traded to its trough of 0.65x P/BV during the GFC. We expect DPS of S$1.32 to be maintained in FY20F – its c.8% yield should provide support to the share price. See DBS Share PriceDBS Target PriceDBS Dividend History.
  • We also keep a HOLD call on UOB (SGX:U11) – its GFC trough valuations were at 0.7x P/BV. We cut DPS to S$1.10 (FY19: S$1.30) given its track record of slashing special dividends during periods of weak profit growth. Its dividend yield of c.6% is also the weakest among peers. We would look for better entry levels closer to GFC valuations. See UOB Share PriceUOB Target PriceUOB Dividend History.

Andrea CHOONG CGS-CIMB Research | LIM Siew Khee CGS-CIMB Research | https://www.cgs-cimb.com 2020-03-19
SGX Stock Analyst Report HOLD MAINTAIN HOLD 18.80 DOWN 24.330