Singapore Banks - RHB Invest 2020-06-18: Prolonged NIM Squeeze From FFR Weakness

Singapore Banks - RHB Invest | SGinvestors.io OVERSEA-CHINESE BANKING CORP (SGX:O39) DBS GROUP HOLDINGS LTD (SGX:D05) UNITED OVERSEAS BANK LTD (SGX:U11)

Singapore Banks - Prolonged NIM Squeeze From FFR Weakness

  • Remain NEUTRAL on a prolonged low interest rate period. The US Federal Reserve guided last week for the federal fund rate (FFR) to remain near zero till 2022. This translates into the SIBOR staying soft – banks’ NIMs are expected to be narrow in FY20-21. Asset quality remains a key negative for banks’ earnings, notwithstanding Singapore moving into a Phase 2 re-opening later this week.
  • Within the sector, we prefer OCBC (SGX:O39) the most, as it has a stronger capital ratio and high exposure to a likely faster recovering Greater China.



US Fed’s 10 Jun guidance points to a NIM squeeze through early 2022.

  • The US central banking system cut the FFR twice (150bps in total) to the current upper bound 0.25%. The 3-month SIBOR is now at 0.54% vs 1Q20’s 1.55% average. The 10 Jun guidance from the US Fed was for the FFR to remain near zero till 2022, which should translate into a soft 3-month SIBOR for the duration and, hence, narrow banks’ NIMs.
  • The 1Q20 average NIM of these banks stood at 1.78%, and we forecast an FY20 average of 1.69% vs FY19’s 1.81%. We estimate average FY21 NIM to be even lower: 1.65%.


Yet to see the worst of asset quality.

  • As of March, all three banks we cover (SG Banks) recorded NPL ratios of 1.5-1.6%. LLC was a high 88- 92%. With the Government guiding for a 2020 GDP contraction of 4-7%, we forecast a 2.2% average NPL ratio by end 2020 – provisions will stay high, in our view.
  • Although Singapore is moving into a Phase 2 re-opening this week, it remains to be seen how the small & medium enterprises will fare over the next few months.


OCBC has the highest CET1 capital adequacy ratio (CAR) amongst peers.

  • OCBC’s 1Q20 CET1 CAR stood at 14.3% – higher than DBS and UOB’s 13.9% and 14.1%. This is a big positive for OCBC, given the current tough economic circumstances.


Collapse for FY20F earnings.

  • We forecast SG Banks to record 2020 net profit falls of between 26% and 36% y-o-y. These declines are primarily due to higher loan loss provisioning and narrower NIMs.


Short-term share price weakness is likely.

  • SG Banks’ gave investors YTD total returns of between -18% and -15%. See
  • Whilst the re-opening of the Singapore economy is a positive, the extent of the asset quality damage remains to be seen. We believe such uncertainties will lead to further short-term share price downsides, but – on a 12-month timeframe – we are NEUTRAL on SG Banks.


Our preferred pick for Singapore Banks - OCBC

  • We have a GGM-derived SGD8.70 Target Price on our preferred pick, OCBC (SGX:O39), based on 0.81x 2020F P/NBV. We are NEUTRAL on the bank, 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, its 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 the consolidated financials for SG Banks in PDF report attached below.
  • See also





Leng Seng Choon CFA RHB Securities Research | https://www.rhbinvest.com.sg/ 2020-06-17
SGX Stock Analyst Report NEUTRAL MAINTAIN NEUTRAL 8.700 SAME 8.700
NEUTRAL MAINTAIN NEUTRAL 18.700 SAME 18.700
NEUTRAL MAINTAIN NEUTRAL 19.400 SAME 19.400



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