Singapore Banks - CGS-CIMB Research 2020-07-16: 2Q20 Watch Out For The Margin Cliff

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DBS GROUP HOLDINGS LTD (SGX:D05) OVERSEA-CHINESE BANKING CORP (SGX:O39) UNITED OVERSEAS BANK LTD (SGX:U11)

Singapore Banks - 2Q20 Watch Out For The Margin Cliff

• We expect c.15-23bp of NIM compression in 2Q20F as benchmark rates collapsed. This could be the worst on record–expect smaller decline in 2H20.
• We think 2Q20F credit costs could stay elevated at c.54-66bp from overlays, a pre-emptive move against potential credit quality deterioration at end-2020.
• Reiterate Neutral as NIM headwinds play out. We think credit cost surprises are priced in, but risks of lower dividends may trigger some profit-taking.
• Prefer DBS (SGX:D05) for its sustained strength in treasury income to buffer topline weakness, smallest SME book amongst peers, and dividend visibility.

A ‘difficult’ quarter for NIMs - steep decline presents downside risk

• We note some tailwind demand in 2Q20F loan growth, although regional border closures hampered this. Growth came from non-trade corporate loans – ST facilities in SG and HK for DBS (we expect 1.5% q-o-q in 2Q20F), overseas project drawdowns for OCBC (+1.4% q-o-q), and broad-based drawdowns from SG, MY and AU for UOB (+1.5% q-o-q).
• We think NIMs could be the negative surprise this quarter, and pencil in -23bp q-o-q to 1.63% for DBS, -15bp q-o-q to 1.61% for OCBC, and -20bp to 1.51% for UOB to reflect the substantial 44bp/72bp dip in 3MSIBOR/3MSOR over 2Q20, as led by the 115bp decline in 3MLIBOR.
• With benchmark rates close to bottoming out, we think NIM declines in coming quarters will be comparatively subdued.

Risk-off sentiment may dull fees, but treasury gains compensate

• The height of the lockdowns in 2Q20F is likely to result in a weaker fee income showing. Card spending stayed soft while wealth income was lower due to the general risk-off sentiment and restrictions on relationship managers to meet clients. However, trading and investment gains may jump even higher given conducive equity markets in 2Q20F – thereby cushioning non-II weakness.
• OCBC could see a significant recovery on this front, recovering the substantial MTM losses incurred in 1Q20.

More front-loading of credit costs – but largely priced in

• While specific provisions (SPs) should moderate to their stable run-rates in 2Q20F given the absence of noteworthy chunky NPLs (e.g. Hin Leong in 1Q20), management overlays on the back of weakened macroeconomic indicators (e.g. GDP) and conservative asset quality outlook should keep credit costs elevated.
• Given the front-loading in 1Q20, we expect a lower 60bp in 2Q20F for DBS and 66bp for OCBC. Relatively lower impairments in 1Q20 will likely push UOB’s 2Q20F provisions contrastingly higher to 54bp in 2Q20F. For now, these impairments are firmly within the guided 80-130bp over FY20-21F.

Reiterate Neutral; some profit-taking likely on NIM headwinds

• The banks’ strong capital ratios (c.14%) make clear their ability to maintain their stated dividend policies (DBS’s S$1.32 DPS in FY20F, though this may be reviewed, OCBC’s progressive policy of S$0.53 DPS), but UOB’s 50% payout stance may present downside risks from our current S$1.10 DPS given revenue headwinds.

Singapore Banks

• See
  • DBS Share Price, DBS Target Price, DBS Dividend History.
  • OCBC Share Price, OCBC Target Price, OCBC Dividend History.
  • UOB Share Price, UOB Target Price, UOB Dividend History.
  • DBS to announce 1H20 earnings on 6 Aug; OCBC to announce 1H20 earnings on 7 Aug; UOB to announce 1H20 earnings on 6 Aug. See 1H2020 Earnings Schedule for STI Constituents.

Andrea CHOONG CGS-CIMB Research | LIM Siew Khee CGS-CIMB Research | https://www.cgs-cimb.com 2020-07-16

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