Singapore Banking Monthly - Phillip Securities 2020-05-18: Building Reserves As Outlook Dims

Singapore Banking Monthly - Phillip Securities Research | SGinvestors.io DBS GROUP HOLDINGS LTD (SGX:D05) OVERSEA-CHINESE BANKING CORP (SGX:O39) UNITED OVERSEAS BANK LTD (SGX:U11)

Singapore Banking Monthly - Building Reserves As Outlook Dims

  • Local interest rates continue sliding to 0.69% for 3M-SIBOR, representing a 131 bps decline y-o-y. This will negatively impact NIM in 2Q20. Our NIM estimates for FY20e were revised downwards by another 10 bps.
  • March loans growth decelerated to 2.41% y-o-y, weighed down by consumer loans. We expect industry loans growth to remain intact at 2 – 3% for FY20e.
  • Local banks announced their 1Q20 results, with higher levels of allowances weighing down performance.
  • Tempered market volatility saw SGX’s DDAV experience a fall in April by 19% y-o-y. SDAV performed better with a growth of 35% y-o-y in April.
  • Reduce the Singapore Banking Sector to NEUTRAL. Additional allowances under taken by banks as credit costs rise in the face of the pandemic will reduce earnings by 20 – 30% over the next two years. However, dividend yield of 5 – 7% remains attractive for investors.

Pressures mount on local lending rates

  • Any resilience expected for local interest rates in March took a hit over the past week, with 3M-SIBOR falling to 0.69% and 3M-SOR falling to 0.26%. This is 86 bps and 103 bps lower from the average rates experienced in 1Q20 respectively.

HIBOR bucks the trend of rate declines

  • 1M and 3M-HIBOR also slid in recent days, falling to 0.71% and 1.20% from an average of 1.81% and 1.98% in the first quarter respectively. Current HIBOR levels were last observed in 2018.

Impact on NIM for local banks

  • The lower interest rates will see local banks face downward pressures on NIMs from 2Q20. In particular, UOB have seen NIM compress by 7 bps y-o-y while DBS saw NIM compress by a more modest 2 bps y-o-y in 1Q20. OCBC was able to hold NIM stable in 1Q20 y-o-y as CASA deposits grew from $138bn to $160bn y-o-y (+16% y-o-y), marking a CASA ratio improvement from 47% to 51% as of 1Q20.
  • We have revised full year NIM for each of the banks downwards by 10 bps from their reported NIM in 1Q20. This will result in a c.5% impact on NII.

Loans growth muted as consumer loans show greater weakness

  • Domestic loans growth slowed to 2.41% y-o-y in February, as consumer loans shrank 2.43% y-o-y, the steepest decline since consumer loans started contracting since April 2019.
  • We expect consumer loans to continue to decline as consumer spending weaken due to the economic lockdown, but businesses loans may benefit from government relief measures to support lending to businesses looking to tide through the liquidity crunch. We maintain our expectations for loans growth to come in at 3% for FY2020.

Banks begin building allowances as credit costs look to increase over the next two years

  • All three banks have released their 1Q20 results over the past two weeks, with earnings largely impacted by allowances undertaken for possible impact as a result of the COVID-19 pandemic.
  • The banks have guided for credit costs increment over the next two years of between 80 – 130 bps alongside slowing of business momentum moving forward.

Volatility falls towards normalcy as derivatives momentum reverses

  • Volatility fell over the past 1.5 months, as the VIX index fell from a monthly average of 57.7 in March to 41.4 in April. For the month of may, the trend looks set to follow suit, with MTD VIX average at 32.6.
  • Based on data released by SGX for the month of April, DDAV showed signs of fatigue, falling to 0.83mn contracts in April, a 19% fall y-o-y and 35% below the average of 1.2mn contracts in the first quarter of 2020. Derivatives performance looks to extend its muted performance in 2Q20.
  • While SDAV has also fallen from the peak experienced in March, figures for April still represents a 35% increase y-o-y. Preliminary data for May continue indicate slowing growth, but securities should still experience double-digit growths for the period ending June 2020 for SGX.

Investment Action

Reduce the Singapore Banking Sector to NEUTRAL.

  • Earnings will be impacted negatively by 20 – 30% over the next two years as local banks begin building allowances to withstand the impact from the COVID-19 pandemic. Nevertheless, expected dividends remain attractive, providing 5-7% yield for investors and current prices.
  • As such, we have revised our target prices of the respective banks by taking on necessary allowances and compressed NIMs to reflect the impact of interest rate cuts in March.
  • We pick DBS (SGX:D05) as our preferred counter within the sector, as its business momentum remains the strongest among the three banks, which will see it better tide through the medium-term headwinds. Its capital position and dividend policy also presents investors with highest level of dividend yield at 6.95%, which are paid out on a quarterly basis.
  • We expect DBS dividend yield to be resilient as the bank has emphasised its commitment to stable dividend not limited to any targeted payout ratio or CET-1 ratio as long as operational performance is not heavily compromised. The bank expects full year revenue to come in at levels similar to FY19, with y-o-y increase of $500mn in 1Q20 to be offset by slower business momentum for the rest of the year.
  • See

Tay Wee Kuang Phillip Securities Research | https://www.stocksbnb.com/ 2020-05-18