Singapore Banks - UOB Kay Hian 2020-03-11: Exposure To O&G Sector – Tried, Tested & Whittled Down

Singapore Banks - UOB Kay Hian Research | SGinvestors.io DBS GROUP HOLDINGS LTD (SGX:D05) OVERSEA-CHINESE BANKING CORP (SGX:O39) UNITED OVERSEAS BANK LTD (SGX:U11)

Singapore Banks - Exposure To O&G Sector – Tried, Tested & Whittled Down

  • Banks have whittled down their exposures to the O&G sector through recoveries and write-offs. The remaining exposures have weathered volatilities in crude oil prices over the past five years. Additional provisions are limited by significant mark down in valuation of collaterals.
  • Banks’ dividend yields have surged to about 6% after the recent steep correction. OCBC is trading below BVPS with 2020F P/B at an attractive 0.90x. See DBS Dividend History, OCBC Dividend History, UOB Dividend History.
  • Maintain OVERWEIGHT. Re-iterate BUY for DBS and OCBC.



WHAT’S NEW


Collapse in prices of crude oil.

  • Crude oil prices went into a tailspin after Saudi Arabia flooded the market and slashed official selling prices by US$6-8 per bbl for the month of April, following the breakdown in talks between OPEC and Russia. The alliance between OPEC and Russia has restrained supply and supported prices of crude oil since early-17.
  • The International Energy Agency (IEA) had earlier cut its oil demand forecast by 1.1m bbl per day for 2020 (possibly marking the first year of annual drop in demand since the Global Financial Crisis) due to the Covid-19 outbreak causing a deep contraction in China’s oil consumption and major disruptions to global travel and trade.

Unprecedented flight to safety.

  • Prices of crude oil collapsed by 10% last Friday and 25% this Monday to a four-year low. The plunge triggered an unprecedented flight to safety to government bonds. In the US, 10-year government bond yield has collapsed by 1.38ppt ytd to 0.54%, a historic low.
  • In Singapore, yield for 10-year government bond has similarly dropped by 0.73ppt ytd to 1.01%.


ACTION


Banks have weathered volatilities in prices of crude oil.

  • The drop in prices of crude oil by 46% in 2014 and 30% in 2015 caused banks to suffer NPL formations and incur higher provisions for exposures to the Oil & Gas (O&G) sector in 2016 and 2017. However, these O&G borrowers have weathered low crude oil prices for the past five years.
  • Banks would also have beefed up provisions for exposures to the O&G sector under FRS 109, which was implemented since 1 Jan 18.

DBS (SGX:D05) (BUY, Target Price: S$26.20)


OCBC Bank (SGX:O39) (BUY, Target Price: S$12.25)

  • Exposures to the O&G sector accounted for 5% of OCBC’s total loans as of Dec 19.
  • Comprehensively addressed exposure to O&G. OCBC marked down the valuation of collaterals for O&G exposures in 1Q19:
    1. Vessels gainfully employed (70% of oil & gas NPLs) - Marked down to 55-60% of refreshed valuations (40-45% discount).
    2. Vessels pending employment (30% of oil & gas NPLs) - Marked down to 3% of refreshed valuations, based on scrap value at 6% of refreshed valuation minus cost to transport vessels to scrap yard.
  • See OCBC Share Price; OCBC Target Price; OCBC Analyst Reports; OCBC Dividend History; OCBC Announcements; OCBC Latest News.

UOB (SGX:U11) (NOT RATED)


OCBC and UOB already trading below BVPS.

  • We estimate end-FY20 BVPS at S$20.06 for DBS and S$10.84 for OCBC. DBS is trading at 2020F P/B of only 1.07x, while OCBC is trading below BVPS at 0.90x (1xSD below long-term mean).

Attractive dividend yield screams BUY.

  • Over the past 30 years, DBS and OCBC have gone above the dividend yield of 6% once (GFC) and UOB twice (AFC and GFC). A steep correction that causes dividend yield to overshoot to 6% tends to be followed by a sharp rebound. DBS and OCBC currently trade at attractive 2020F dividend yields of 6.2% and 5.9% respectively.
  • See report: Singapore Banks - UOB Kay Hian Research 2020-03-10: The Magic Number Is 6%.
  • We expect dividend payout for Singapore banks to be sustainable due to strong CET-1 CAR, which are above 14%. The banks also have the option to turn on their scrip dividend scheme should regional economies slip into a recession.

Maintain OVERWEIGHT.

  • Banks are yield plays. DBS and OCBC provide attractive dividend yields of 6.1% and 5.8% respectively, which differentiate them from regional peers. We see their dividend payout ratios as sustainable due to Singapore banks’ robust CET-1 CAR.


SECTOR CATALYSTS

  • Banks evolving into yield plays.


ASSUMPTION CHANGES

  • We cut our 2020 earnings forecast for DBS by 5.8% and by 3.7% for OCBC due to:
    1. further NIM compression on a 75bp cut in Fed funds rate in 1H20; and
    2. additional credit costs of about 5bp due to exposure to the O&G sector.


RISKS

  • Outbreak of Covid-19 affecting growth and credit costs in 2020.
  • Economic slowdown in China.





Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2020-03-11
SGX Stock Analyst Report BUY MAINTAIN BUY 26.200 SAME 26.200
BUY MAINTAIN BUY 12.250 SAME 12.250
NOT RATED MAINTAIN NOT RATED 99998.000 SAME 99998.000



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