Singapore Banks - DBS Research 2020-03-05: Further NIM Pressures

UNITED OVERSEAS BANK LTD (SGX:U11) OVERSEA-CHINESE BANKING CORP (SGX:O39)

Singapore Banks - Further NIM Pressures

NIM likely to see more downside on surprise Fed cut.
Keep watch on COVID-19 situation.
Downgrade UOB to HOLD; Target Price S$25.50 on limited catalysts.
Singapore banks’ share prices likely to be supported at 1.0x P/BV barring any major deterioration in asset quality.

The Federal Reserve (Fed) announced a 50-bp interest rate cut in an emergency move on 3 Mar 2020, with market pricing in two further cuts by 1H20. Singapore banks had previously guided for various magnitudes of NIM compression:
- DBS: ~7bps premised on one Fed rate cut assumption in Jun 2020.
- OCBC: NIM to remain above FY18’s 1.70% level (FY19: 1.77%).
- UOB: marginal NIM decline (~5bps).
Following the Fed’s move, as well as Hong Kong’s rate cut in tandem, we believe there is further SIBOR/SOR downside. While impending decline in cost of funds will cushion decline in loan yields, we believe overall NIM will still see further pressure, resulting in our negative earnings revision of 1-2% through FY20F across the sector on 1-2bps NIM reduction.
We currently forecast 6-9bps NIM decline across the banks. We believe the ongoing competition in mortgages as well as flight to quality loans will further compress loan yields. NIM sensitivity: Every 10bps decline in NIM has 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.1-3bps with a corresponding 1.0-2.5% decline in net profit across the Singapore banks.

We are keeping watch of the COVID-19 situation, which has since saw more countries being affected and increased restraints on global travel. The banks’ initial assessment of revenue impact (c.1-2%) assumes that COVID-19 is controlled by summer. We believe that given the scale of outbreak currently, it might take some time for business and investment sentiment to resume into 2H20, which may drag on loan growth and non-interest income for FY20F.
We forecast sector credit costs to increase 6bps to c.28bps in FY20F in our base case as businesses with direct impact from reduced consumer spend and tourism, amongst others, may see pockets of stress, but a prolonged COVID-19 outbreak may lead to further credit costs.

The Federal Reserve announced a 50-bp interest rate cut in an emergency move on 3 Mar 2020. While OCBC management has previously guided for FY20F NIM to remain above FY18’s level of 1.70%, we believe that there is further NIM downside for OCBC on the back of Hong Kong rate cut following Fed cut, as well as expected decline in SIBOR.
We revised FY20F NIM assumptions by c.-1bps, resulting in earnings revision of c.1%, with FY20F NIM at 1.71%. We maintain our HOLD call as we believe there are limited catalysts for the stock currently, given NIM pressures as well as uncertainty over potential credit costs arising from OCBC’s SME books across the region.

We remain cautious over OCBC’s SME books across the region, in the face of a potential regional slowdown amidst the ongoing COVID-19 situation and Hong Kong protests. Our revised earnings are c.2-3% below FY20/21F earnings consensus.

OCBC currently trades at c.1.0x FY20F P/BV, 1SD below its average 10-year forward P/BV multiple. We believe sustained business momentum and a higher dividend payout ratio (FY19 saw dividend payout ratio of c.47%, lowest amongst peers) are catalysts.

We see limited catalysts for the stock in the near term. Our revised S$11.00 Target Price is based on the Gordon Growth Model (10% ROE [previously 11%], 3% long-term growth, 11% cost of equity). This is equivalent to c.1.0x FY20F P/BV, which is below its average 10-year forward P/BV multiple.
We believe valuations are supported at c.1.0x forward P/BV barring any major deterioration in asset quality, given that dividend yield remains attractive at c.5%. Our earnings revision of c.1% is due to lowered NIM assumptions.
See OCBC Bank Share Price; OCBC Bank Target Price; OCBC Bank Analyst Reports; OCBC Bank Dividend History; OCBC Bank Announcements; OCBC Bank Latest News.

The Federal Reserve (Fed) announced a 50-bp interest rate cut in an emergency move on 3 Mar 2020. UOB’s management had previously guided for a marginal net interest margin (NIM) decline (~5bps). We believe that there is further NIM downside following the surprise Fed cut which will also impact SIBOR. We further trim our NIM assumptions by 2bps to 1.71% (FY19: 1.78%), resulting in earnings revision of c.2%.
While UOB will continue to leverage on its strong capital position to capture cross-border loan growth opportunities as it continues to target broad-based commercial loan growth amid a slower growth environment, we believe there is limited catalysts on the stock for now given further NIM pressures and uncertainty from COVID-19 outbreak globally.

We believe that UOB is likely to sustain its S$1.30/share full-year dividend for FY20F should the COVID-19 situation be a one-off event with 2H20 recovery expected. UOB continues to build on its digital-only bank, TMRW, and will launch this in Indonesia in FY20. Our revised earnings is c.1-2% below FY20/21F earnings consensus.

Lower–than-expected credit costs could drive earnings. Sustained ROE improvement will continue to drive UOB's share price.

We arrive at our revised Target Price of S$25.50 based on the Gordon Growth Model (10.5% ROE [previously 11%], 3% growth, 11% cost of equity). This is equivalent to c.1.0x FY20F P/BV, which is slightly below its average 10-year forward P/BV multiple. Our earnings revision of c.-2% is due to lowered NIM assumptions.
We believe valuations are supported at c.1.0x forward P/BV barring major deterioration in asset quality, given that dividend yield remains attractive at c.5%.
See UOB Share Price; UOB Target Price; UOB Analyst Reports; UOB Dividend History; UOB Announcements; UOB Latest News.