Singapore Banks - CGS-CIMB Research 2020-04-25: Can We Avoid Triple-digit Credit Costs?


Singapore Banks - Can We Avoid Triple-digit Credit Costs?

  • Consensus are generally pricing in c.47bp/ 47bp/ 40bp of FY20F credit costs for DBS (SGX:D05)/ OCBC (SGX:O39)/ UOB (SGX:U11). 1Q20F guidance could see more downward revisions.
  • For 1Q20F, we expect 55/71/47bp of credit costs for DBS/ OCBC/ UOB due to chunky O&G specific provisions and macro overlays.
  • Relief measures by regional central banks may smoothen credit costs into double-digits over FY20F-21F, instead of a triple-digit full-year sum.
  • We expect 2-3bp NIM compression in 1Q20F. Reiterate NEUTRAL on sector. Prefer UOB for 1Q20F earnings stability.

GFC impairments were much more than just for CDOs

  • Singapore banks’ credit costs rose to c.120bp during the GFC and c.200-262bp during AFC. Collaterised debt obligations (CDOs) were one of the reasons for elevated impairments during the GFC, but a closer look revealed other NPLs for regional corporate loans, equity financing in SG and HK and unemployment-related delinquencies. AFC’s higher credit costs were largely due to region al exposures and general conservatism in GPs.
  • For DBS, c.80% of its credit costs in FY98-99 were for Thai Danu Bank. Most of UOB’s provisions then were for regional businesses while OCBC took opportunistic tax-free provisions for its Malaysian business in FY99.

Moratoriums and relief measures will stretch credit costs into FY21

  • With negative global growth, FY20F is shaping up to become a replay of pre vious crises . A repeat of triple-digit full-year impairments could be on the cards in the aftermath of Covid-19. However, the crucial difference this time around is the speed and quantum of government and central bank relief that we believe could allay the spike in asset quality.
  • For 1Q20F, we expect 55/71/47bp of credit costs for DBS/ OCBC/ UOB with chunky specific oil and gas provisions and macro overlays as weaker GDP estimates, unemployment and disrupted operations due to the pandemic filter through.
  • For now, we keep our 60/58/58bp FY20F credit cost estimates for DBS/ OCBC/ UOB pending management’s guidance.

Reiterate NEUTRAL; c.6-7% dividend yield supported by c.14-15% CET1

  • The banks have performed in line with FSSTI YTD; the index recovered c.13% from the Mar-23 low, while banks recovered c 11%. 1Q20F revenue drivers should not be too impacted by the pandemic just yet, but forward-looking macro overlays are likely to weigh down net profit by 17-31% q-o-q. Forbearance measures by regional central banks should thwart a structural deterioration of asset quality.
  • Robust CET-1 ratios of 14.1-14.9% should sustain FY20F 6-7% dividend yields. UOB preferred for 1Q20F; current valuations are below previous trough - oil crisis (0.89x in 2016) and GFC (0.93x). We would look to enter at cheaper valuations pending forward guidance on impairments.

DBS: 1Q20 results on 30 April 2020

  • We expect DBS (SGX:D05) to record net profit of S$1.2bn in 1Q20F (-21% q-o-q/-28% y-o-y). The weaker earnings trend is likely to be driven by heftier provisions owing to macro overlays and possibly weakened O&G credits. We do not forecast a significant rise in SPs, but softer economic estimates such as dimmer GDP growth and rising unemployment as well as provisions for an oil trading exposure are likely to raise impairment buffers to an estimated 55bp in 1Q20F. Using our c.60bp credit cost estimate, we see a high likelihood for earnings downside if credit costs exceed c.44bp in subsequent quarters.
  • We think NIMs could compre ss 3bp q-o-q to 1.83% in 1Q20F as the 3 Fed rate cuts in FY19 filter through. Loan growth should be relatively unaffected by weaker business sentiments due to the pandemic – we pencil in +0.7%. We expect strong wealth income from higher volumes to support non-II. Trading revenue should also improve q-o-q on the back of a surge in volumes on volatile markets.

OCBC: 1Q20 results on 8 May 2020

  • We expect OCBC (SGX:O39) to post net profit of S$859m in 1Q20F (-31% q-o-q/-30% y-o-y). We think the key drag on earnings will stem from MTM losses from Great Eastern Holdings (SGX:G07)’s shareholders funds and heftier provisions. Our estimation of 71bp in credit costs for 1Q20F factor in macro overlays due to weakened economic indicators of GDP growth and unemployment across the region, as well as further provision top-ups for the bank’s O&G portfolio and a distressed oil trader exposure.
  • We anticipate loan growth of +0.5% q-o-q stemming from primary home sales activity and pockets of opportunity from corporate customers expanding into overseas assets such as the acquisition of data centres. We understand that the bank has received high volumes of enquiries for drawdowns of existing credit lines and temporary bridging loans (as per the Government’s Enterprise Financing Scheme), but most of these will likely be reflected from 2Q20 onwards as applications get processed.
  • We expect 2bp NIM compre ssion to 1.75% in 1Q20F on continued funding cost management (shedding fixed deposits amid 86.5% LDR) despite lower-yielding asset growth.
  • Wealth fees should stay relatively stable in 1Q20 on larger transaction volumes, but AUM balances are likely to contract on weaker markets. Trading incom e is likely to trend lower q-o-q on weaker contributions from Great Eastern Holdings, although offset by stronger customer flows. Credit card fees are likely to start seeing some pressure as larger-ticket travel-related purchases get pushed back due to Covid-19, although more e-commerce transactions should offset this slightly.

UOB: 1Q20 results on 6 May 2020

  • We estimate UOB (SGX:U11)’s 1Q20F net profit at S$844m (-17% q-o-q/-20% y-o-y). We think NIMs could see some pressure, compressing 3bp in 1Q20F, on the back of stronger financing growth of +0.8 % q-o-q. We understand that UOB was able to capitalise on a pick-up in demand of short-term working capital loans, particularly in US$, given its strong dollar funding position (US$ LDR of 62% in 4Q19).
  • Note the swift reversal of its loan base contracting -2.4% in 4Q19 as the bank de-risked away from North Asia and Singapore. Drawdowns on the government’s temporary bridging and working capital schemes for SMEs, coupled with low-cost funding to banks and a 90% risk-share arrangement (10% risk-weighting on banks), should trickle into loan volumes from 2Q20 onwards.
  • Non-II is likely to be a relative bright spot for UOB (+7% q-o-q/+4% y-o-y) on the back of sustained wealth (UOB does not provide leverage) and trading income (due to mass affluent client profile – less trading oriented). Loan-related fees should improve meaningfully q-o-q (albeit still lower y-o-y), but credit card fees could start faltering given travel restrictions and stay-home orders.
  • We understand that UOB holds 50-60bp in credit costs as its base case for FY20F as it factors in the impact of Covid-19 (FY 19: +16bp). We factor in 47bp in impairments for 1Q20F, premised on SPs coming in at their quarterly average run rates and inputting provisions for weakened O&G exposures as well as macro overlays. Notably, UOB’s has pared down its O&G book to 2-3% of total loans as at Mar 20. Sizeable provisions have been taken from this book since FY17, but provision top-ups are likely given the record low oil prices.

See attached PDF report for complete analysis.

Andrea CHOONG CGS-CIMB Research | LIM Siew Khee CGS-CIMB Research | https://www.cgs-cimb.com 2020-04-25
SGX Stock Analyst Report ADD MAINTAIN ADD 9.040 SAME 9.040