Singapore Banks - UOB Kay Hian 2020-03-24: Is This The Best Time Or The Worst To Buy Banks?

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

Singapore Banks - Is This The Best Time Or The Worst To Buy Banks?

• Banks’ share prices are near five-year lows. Based on our sensitivity analysis, current DBS Share Price and OCBC Share Price have factored in NPL ratio reaching 4.0-4.5% by end-21, which are higher than their peak of 2.9% and 1.7% respectively during the GFC.
• The sell-down could persist a little longer but a trough is in sight.
• Our top pick is OCBC as its 2020F P/B of 0.74x is below trough P/Bs for five out of the past six crises.
• BUY DBS for 2020 dividend yield of 7.8%.
• Maintain OVERWEIGHT.

Stock market correction was fast and furious.

• The sheer speed of contagion in the COVID-19 outbreak caused a shock to financial markets. The VIX Index is currently at 73.1, after reaching a new high of 82.7 in mid-March this year, slightly above the peak of 80.9 during the GFC in Nov 08.

What has the market factored in?

• Banks’ share prices have corrected 34.8% for DBS, 28.9% for OCBC and 33.5% for UOB ytd. See DBS Share Price, OCBC Share Price, UOB Share Price. At current share prices, what has the market factored in in terms of NPL ratio? We seek to answer the question by performing a sensitivity analysis.
• In our analysis, we assume that:
  1. The credit cycle caused by the COVID-19 outbreak last for two years into 2020 and 2021. The NPL ratio will peak in Dec 21 and provisions to be incurred in 2020 and 2021.
  2. The increase in NPLs to come mainly from corporate and SME loans. We assume average loss given default to be 50%.
  3. Our target prices are based on GGM with cost of equity at 8.0% (beta: 1.2x) and terminal growth at 0%. We use BVPS at end-20 and ROE for 2020 in our valuations.
  4. We assume DBS and OCBC maintaining DPS at S$1.32 and S$0.56 respectively for 2020 and 2021. See DBS Dividend History, OCBC Dividend History, UOB Dividend History.
  5. We assume DBS and OCBC turn on their scrip dividend schemes with issue price for new shares set at 10% discount to today’s closing prices, which are S$15.19 and S$7.03 respectively. We assume acceptance for scrip dividend at 75%.

ACTION

Sensitivity analysis: Key conclusions.

• Current share prices of DBS and OCBC have factored in NPL ratios reaching 4.0-4.5% by end-21, which are higher than their peak during the global financial crisis (GFC) of 2.9% for DBS and 1.7% for OCBC. Markets are prone to overshoot during periods of extreme volatility and uncertainties. Thus, the sell-down for banks could persist for a short period of time. However, banks are likely to be oversold and a trough is in sight.
• In the worst-case scenario that NPL ratio hits 6.0% at end-21, double the level seen during the GFC, we expect DBS and OCBC to remain profitable, although net profit would have dropped 68% and 65% respectively in 2020.
• See tables in attached PDF report for more details.

OCBC and UOB trading below BVPS.

• We estimate end-F20 BVPS at S$19.31 for DBS and S$10.52 for OCBC. DBS is trading at only 0.87x 2020F P/B, while OCBC is trading below BVPS at 0.74x (more than 1SD below long-term mean).

Attractive dividend yields scream BUY.

• Over the past 30 years, DBS and OCBC have hit above dividend yield of 6% once (GFC) and UOB twice (AFC and GFC). 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 7.8% and 7.2% respectively.
• We expect dividend payouts for Singapore banks to be sustainable due to their strong CET-1 CAR of 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 7.8% and 7.2% respectively, which differentiate them from regional peers. Our top pick is OCBC.

SECTOR CATALYSTS

• Banks evolving into yield plays.

ASSUMPTION CHANGES

• We cut our net profit forecasts for DBS by 15% for 2020 and by 19% for 2021. We expect NPL ratio to reach 3.0% (previously 1.8%) by end-21. We lower our target price for DBS from S$25.15 to S$21.98.
• We cut our net profit forecasts for OCBC by 16% for 2020 and by 19% for 2021. We expect NPL ratio to reach 2.75% (previously 1.7%) by end-21. We lower our target price for OCBC from S$11.98 to S$10.36.

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/ 2020-03-24

SGX Stock Analyst Report BUY MAINTAIN BUY 21.98 DOWN 25.150

BUY MAINTAIN BUY 10.36 DOWN 11.980

NOT RATED MAINTAIN NOT RATED 99998.000 SAME 99998.000