OVERSEA-CHINESE BANKING CORP (SGX:O39)
UNITED OVERSEAS BANK LTD (SGX:U11)
DBS GROUP HOLDINGS LTD (SGX:D05)
Singapore Banks - Pressured By Fed’s Rate Cut
- Fed announced 100bps rate cut; Net Interest Margin (NIM) to see more downside; further trim OCBC (SGX:O39) and UOB (SGX:U11)’s NIM forecasts by another 5-8bps.
- Raised credit costs further by 4-9bps through FY21F as increased travel restrictions will likely push recovery of global travel and consumption further out.
- Dividends may be reduced on lower earnings.
- Maintain HOLD on OCBC and UOB with reduced Target Price pegged to c.0.8x FY20F P/BV (-2SD below 10 year average).
Further downside for 3MSIBOR.
- DBS Group Research economists believe that short-term SGD rates are likely to follow short-term USD rates lower, following Fed’s cut to zero. SGD interest rates are less susceptible to changes in MAS policy, Instead, the global issues – such as COVID-19, trade war and Brexit – have a much larger impact on USDSGD as well as SGD rates. Flush liquidity will cap a lid on SGD rates.
- DBS Group Research’s 3MSIBOR projections currently stand at 0.40% by 4Q20 (13 Mar 20: 1.22%).
More room for NIM to decline.
- We believe that NIM will decline as loan yields reprice on a lower benchmark rate, though repricing may not be immediate. Against a slower growth backdrop, we believe loan yields may continue to compress due to flight to quality loans. We further trim OCBC and UOB’s NIM forecasts by another 5-8bps in FY20F to reflect lower cost of deposits which is unlikely to offset 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.
Worsened COVID-19 situation raises risks to asset quality.
- Since the start of March, COVID-19 situation globally has taken a turn for the worse. We believe the newly imposed travel restrictions by various countries, and recession fears, will further push out the recovery path for travel and consumption.
- There are heightened risks of third and fourth order impact to economy, in terms of unemployment risks and mortgages, on top of the first and second order impact to freight and other directly-hit industries such as hospitality and travel, aviation, tourism, retail, food and beverage, entertainment, on top of supply chain impacts.
- Higher than expected credit costs would translate into downside earnings risks; based on our sensitivity analysis, every 5bps uptick in credit costs may impact sector earnings by c.3%.
Maintain HOLD on OCBC and UOB with reduced target prices.
- Singapore banks have corrected 20-28% since start of the year. We maintain HOLD call at current prices, given the uncertain macroeconomic outlook and near-zero interest rates environment.
- We derive OCBC and UOB’s revised TPs of S$8.60 and S$19, at c.0.8x FY20F P/BV, 2SD below its average 10-year forward P/BV multiple.
- Taking reference from Global Financial Crisis (GFC) trough valuation, at c.0.7x P/BV, the implied share prices are c.S$7.80 and S$17.40 respectively, representing c.10% downside from current prices.
- We believe there are limited catalysts for Singapore banks for now, given the current zero-rate environment, heightened risks to asset quality and volatile markets, though the above trough levels (at GFC) could be key levels to watch for, on assumption that the situation do not deteriorate further.
- With our estimates reduced, coupled with lower dividends, at current levels, OCBC and UOB still trades at c.5.5% dividend yield, which could provide some support to share prices.
- See
Rui Wen LIM
DBS Group Research
|
https://www.dbsvickers.com/
2020-03-17
SGX Stock
Analyst Report
8.60
DOWN
11.000
19.000
DOWN
25.500
99998.000
SAME
99998.000
