Singapore Banks - RHB Invest 2020-03-30: Still Unattractive After YTD Share Price Plunge

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

Singapore Banks - Still Unattractive After YTD Share Price Plunge

Maintain NEUTRAL on Singapore banks.
With the ongoing COVID-19 pandemic, the Government downgraded its 2020 GDP forecast range to between -4% and -1% last week. The Monetary Authority of Singapore today eased its policy stance by setting the SGD rate of appreciation at 0%.
We forecast banks to record NIM compressions and sharp rises in loan loss provisioning. Banks’ earnings contraction in 2020 will limit share price upsides.

FY19 loan growth was a moderate 3% average for the three Singapore banks we cover (SG Banks). We believe the 2020 GDP contraction will slow investment and lead to a 2020 loans contraction.
We forecast an average 2020 loan contraction of 1.7% for the three banks, with weaknesses across Greater China, Singapore, and other ASEAN member states. There is also further downside risk if the COVID-19 pandemic worsens.

The US Federal Reserve cut the FFR twice in March by a total of 150bps to the current upper bound of 0.25%. The 3-month SIBOR has correspondingly fallen to 1.02% vs February’s 1.69% average. The fall in the 3-month SIBOR will narrow the NIMs of the three banks we cover. Around mid-March, we cut our 2020 NIM forecasts for these banks to an average of 1.71% vs 2019’s average of 1.81%.

As of Dec 2019, all three banks recorded NPL ratios of 1.5%. We forecast that they will post higher NPL ratios of 1.9% by end 2020. There is risk of NPLs coming in higher than our assumptions, considering that, during the severe acute respiratory syndrome or SARS outbreak, the three banks recorded NPL ratios in the high single-digit levels.
We forecast 2020 provisions for DBS, Oversea-Chinese Banking Corp (OCBC), and UOB to be higher by 64%, 21%, and 128%. This will mainly be driven by sectors affected by travel restrictions, as well as supply chain disruptions. The difference in rises is mainly due to differing bases in 2019.

The declines are primarily due to higher loan loss provisioning and lower NIMs. Total estimated 2020 earnings for the three banks are expected to fall 15% y-o-y.

SG banks’ share prices have already fallen by between 19% and 26% YTD. See DBS Share Price; OCBC Share Price; UOB Share Price.
We believe there could be further short-term share price downsides but, on a 12-month timeframe, we are NEUTRAL on SG banks.

Our GGM-derived SGD20.00 Target Price is based on 0.85x 2020F P/NBV. We have a NEUTRAL recommendation on the bank, which factors in a sustainable ROE assumption of 10.3%. Our earnings forecasts have factored in a 2020 NIM squeeze arising from 15 Mar’s FFR cut and higher provisions due to COVID-19 slowing economic growth.
However, given UOB’s more conservative lending, it is our preferred pick within the banking sector. We believe the bank’s share price has the least downside risk amongst its peers in the short term.
See UOB Share Price; UOB Target Price; UOB Dividend History.

Our GGM-derived SGD9.60 Target Price is based on 0.89x 2020F P/NBV and a sustainable ROE assumption of 10%. 10.8% of OCBC’s loans are in Malaysia. Hence, the bank is likely to be more affected by developments there with regards to COVID-19.
See OCBC Share Price; OCBC Target Price; OCBC Dividend History.

We have GGM-derived Target Price of SGD21.50 based on 1.09x 2020F P/NBV. We have a sustainable ROE assumption of 11.2%. The FFR cut will hurt DBS’ NII more than its peers. Given the bank’s higher earnings sensitivity vs peers, at the lower FFR, DBS is the least preferred amongst SG Banks.
See DBS Share Price; DBS Target Price; DBS Dividend History.

Leng Seng Choon CFA RHB Securities Research | https://www.rhbinvest.com.sg/ 2020-03-30

SGX Stock Analyst Report NEUTRAL MAINTAIN NEUTRAL 21.500 SAME 21.500

NEUTRAL MAINTAIN NEUTRAL 9.600 SAME 9.600

NEUTRAL MAINTAIN NEUTRAL 20.000 SAME 20.000