DBS GROUP HOLDINGS LTD (SGX:D05)
OVERSEA-CHINESE BANKING CORP (SGX:O39)
UNITED OVERSEAS BANK LTD (SGX:U11)
Singapore Banks - Rowing Against The Rising Provisions Tide
- The 3 banks’ recent 1Q20 results showed sharply high loan loss provisioning. Their management teams also guided for continued high FY20-21 credit costs on rising NPL ratios. Softer interest rates will lead to narrower NIM, and the full impact of US interest rate cuts will only be felt in subsequent quarters, as guided by management.
- We believe asset quality uncertainties are a major headwind.
- Staying NEUTRAL.
- Within the sector, we prefer OCBC (SGX:O39) the most, given its stronger capital ratio and high exposure to a recovering Greater China.
NIM squeeze to show up from 2Q20 onwards.
- The US Federal Reserve cut the federal fund rate (FFR) twice in March by a total of 150bps to the current upper bound of 0.25%. The 3-month SIBOR correspondingly fell to 0.62% vs 1Q20’s 1.55% average. The fall in the 3-month SIBOR will narrow the NIMs of the three banks. 1Q20 average NIM of these banks was 1.78%, and we forecast an FY20 average of 1.69% vs FY19’s 1.81%.
Asset quality to see significant stress.
- As of March, all three banks recorded NPL ratios of 1.5-1.6%. Loan loss coverage is a high 88-92%. However, as NPLs rise – we forecast a 2.2% average by end 2020 – provisions should increase. NPLs could exceed our assumptions, considering that, during the severe acute respiratory syndrome (SARS) outbreak in 2003, the three banks recorded NPL ratios as high as 8%.
- We forecast 2020 provisions for DBS, OCBC, and UOB to rise by 238%, 112%, and 220% y-o-y – in line with managements’ guidance of a cumulative 80-130bps credit costs over two years. The increase will come from sectors affected by travel restrictions and supply chain disruptions, as well as those related to the oil industry.
OCBC has the highest CET1 CAR amongst peers.
Short-term share price weakness is likely.
- We forecast SG Banks – the banks under our coverage – to record 2020 net profit falls of between 26% and 36% y-o-y. The declines are primarily due to higher loan loss provisioning and narrower NIMs.
- SG Banks’ share prices fell by 20-27% YTD. We see further short-term share price downsides but, on a 12-month timeframe, we are NEUTRAL on SG Banks. See
We have a GGM-derived SGD8.70 Target Price on OCBC
- We have a GGM-derived SGD8.70 Target Price on OCBC (our preferred pick) based on 0.81x 2020F P/NBV. We are NEUTRAL on OCBC, factoring in a sustainable 8.3% ROE assumption vs 1Q20’s 6%.
- Capital strength is vital, and OCBC has the highest CET1 CAR.
- In addition, OCBC’s high 25% loan share to Greater China is a positive, as this region is likely ahead of ASEAN in resuming economic activities post the COVID-19 shutdowns.
- See
Leng Seng Choon CFA
RHB Securities Research
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https://www.rhbinvest.com.sg/
2020-05-18
SGX Stock
Analyst Report
18.700
SAME
18.700
8.700
SAME
8.700
19.400
SAME
19.400
