Singapore Banks 1Q20 Round Up - UOB Kay Hian 2020-05-11: First Stage Of Credit Cycle Is Always The Hardest

Singapore Banks 1Q20 Round Up - 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 1Q20 Round Up - First Stage Of Credit Cycle Is Always The Hardest

Singapore banks suffered a double whammy of the COVID-19 pandemic and sudden collapse in crude oil prices in 1Q20. The impact on asset quality is bruising, but banks are able to weather these challenges due to their adequate provisioning and strong capital base.
DBS (SGX:D05) and OCBC (SGX:O39) guided credit costs of 80-130bp and 100-130bp respectively, on a cumulative basis over 2020 and 2021, which are in line with our expectations.
Maintain OVERWEIGHT.

BUY DBS (Target Price: S$22.30) and OCBC (Target Price: S$9.78).

Singapore Banks 1Q20 Results

DBS met expectations with strong growth in non-interest income, which enabled the bank to absorb the negative impact from higher credit costs.
OCBC’s results were slightly below expectations but we perceive the hit from unrealised MTM losses as non-recurrent.

Huge influx of deposits due to flight to safety.

DBS and OCBC registered mid single-digit loan growth of 6% and 5% y-o-y respectively in 1Q20. UOB (SGX:U11)’s loan growth was slower at 3% y-o-y as the bank had de-risked its balance sheet by trimming exposures to Singapore and North Asia in 2H19.
DBS and OCBC benefitted from flight to safety with total deposits expanding by 13% and 7% y-o-y respectively.

Stable NIM from higher LIBOR.

OCBC and UOB maintained stable NIM at 1.86% and 1.76% respectively. Both banks benefitted from elevated LIBOR interbank rates due to stressed funding market conditions, resulting in better margins for US dollar-denominated loans. UOB’s NIM narrowed by a significant 5bp q-o-q to 1.71% due to lower interest rates. Management has also conservatively kept tenure of new lending relatively short.

Wealth management still resilient.

DBS and OCBC registered strong growth in fees of 14% and 10.3% y-o-y respectively in 1Q20 driven by wealth management (DBS: +14% y-o-y, OCBC: +32% y-o-y), which benefitted from pre-pandemic growth momentum during January and February.
DBS generated growth of 17% y-o-y from loan-related fees, while OCBC saw an increase of 27% y-o-y for brokerage & fund management.

Contrasting fortunes for other non-interest income.

DBS’ other non-interest income grew by a hefty 39.3% y-o-y due to strong net trading income and gains from investment securities. In contrast, OCBC suffered unrealised mark-to-market (MTM) losses of S$413m from its insurance operations and S$89m for investments undertaken for Great Eastern (SGX:G07)'s shareholders' fund (classified under net trading income). In total, these unrealised MTM losses pose a drag of S$294m on OCBC’s overall financial performance.

Coping with stresses on asset quality.

Oil trader Hin Leong filed for bankruptcy protection on 17 Apr 20. DBS, OCBC and UOB have exposures of US$290m (S$415m), US$250m (S$360m) and US$140m (S$200m) respectively to Hin Leong. All three banks have recognised exposures to Hin Leong as NPLs and set aside specific provisions accordingly in 1Q20. NPL balances for DBS, OCBC and UOB have increased 14%, 13% and 7% q-o-q respectively.

Beefing up general provisions to prepare for rainy days.

DBS and OCBC have set aside general provisions of S$703m and S$382m respectively to address risks arising from the COVID-19 pandemic, including making forward-looking macro-economic variable (MEV) adjustments. The hike in general provisions pushed total credit costs for DBS and OCBC to an elevated level of 119bp and 86bp respectively. OCBC’s loan-loss coverage improved by a significant 4ppt q-o-q to 90%.
UOB transferred S$260m from retained earnings to Regulatory Loss Allowance Reserve (RLAR). If we include the transfer, UOB’s credit costs would be higher at 69bp, but still lower compared to its peers.

Resiliency from strong capital adequacy.

OCBC has the highest CET-1 CAR among local banks at 14.3%. DBS and UOB also have robust CET-1 CAR of 13.9% and 14.1% respectively, which are significantly above minimum requirement of 9.0%.

DBS maintains stable dividend.

DBS has declared quarterly dividend at 33 S cents (unchanged) for 1Q20. Its scrip dividend scheme is not applicable for the quarterly dividend. See DBS Dividend History.

Maintain OVERWEIGHT.

Our positive view on Singapore banks rests on their attractive dividend yields of above 5%, which differentiate them from their regional peers. DBS and OCBC provide attractive 2020 dividend yields of 7.0% and 6.4% respectively. We see their dividend policy as sustainable due to Singapore banks’ robust CET-1 CAR.

New guidance in line with our expectations.

DBS and OCBC have guided for credit costs of 80- 130bp and 100-130bp, respectively, on a cumulative basis over 2020 and 2021. Management guided base-case credit costs of 50-60bp for 2020. These revised guidances assume a deeper and more prolonged economic impact from the COVID-19 pandemic.
See report:
- DBS Group 1Q20 - UOB Kay Hian 2020-05-04: New Guidance In Line With Our Expectations.
- Oversea-Chinese Banking Corp (OCBC) 1Q20 - UOB Kay Hian 2020-05-11: Taking It On The Chin.
See also:

Sector Catalyst

Banks evolving into yield plays.
Easing of lockdown across various countries around the globe.

Sector Risks

Outbreak of COVID-19 affects growth and credit costs in 2020 in 2021.
Escalation of geopolitical tension and trade conflict.

Jonathan KOH CFA UOB Kay Hian Research | Peihao LOKE UOB Kay Hian | https://research.uobkayhian.com/ 2020-05-11

SGX Stock Analyst Report BUY MAINTAIN BUY 22.300 SAME 22.300

BUY MAINTAIN BUY 9.780 SAME 9.780

NOT RATED MAINTAIN NOT RATED 99998.000 SAME 99998.000

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