Singapore Banks - UOB Kay Hian 2020-07-30: Preparing For Long Tails & Black Swans

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

Singapore Banks - Preparing For Long Tails & Black Swans

  • MAS imposed a cap on 2020 DPS based on 60% of 2019 DPS. The restriction is pre-emptive to ensure local banks are able to support recovery in the real economy even if the adverse scenario of a prolonged public health crisis materialises. We expect a kneejerk drop in share prices.
  • Based on required dividend yield of 4%, we see buying support for DBS (SGX:D05) at S$18.45, OCBC at S$7.95 and UOB at S$19.50.
  • Maintain OVERWEIGHT. BUY DBS (Target price: S$23.12) and OCBC (SGX:O39) (Target price: S$11.22).



Imposes cap of 60% on dividends.

  • Monetary Authority of Singapore (MAS) has “called on” locally-incorporated banks headquartered in Singapore to:
    1. Cap total DPS for 2020 at 60% of 2019’s DPS, and
    2. Offer shareholders the option of receiving the dividends to be paid for 2020 in scrip (re-introduce scrip dividend schemes)


Preserving banks’ position of strength.

  • MAS recognises that local banks have built up strong capital positions over the years. In the latest stress test conducted by MAS, local banks’ capital positions are impacted but stayed above MAS’ minimum requirement. The adverse scenario assumes:
    1. GDP contracts by 6% over a 2-year period (recession in 2020 and 2021),
    2. unemployment rate rises to 6%,
    3. equity and oil prices fall by more than 30%, and
    4. property prices drop by more than 35%.
  • The adverse scenario is consistent with a prolonged public health crisis, such as the current COVID-19 pandemic.


Cap on dividends is a pre-emptive measure.

  • The operating environment is highly uncertain. MAS wants to ensure that local banks have adequate capital buffers to absorb economic shocks and continue to support recovery in the real economy, even if our worst fear of a prolonged COVID-19 pandemic materialises.


Adverse change in operating environment calls for a rethink.

  • MAS announced on 7 Apr 20 that “our banks have sufficient capital to see them through the current economic slump while continuing to supply credit to the economy to support businesses and individuals”. MAS previously did not see a need to restrict banks’ dividend policies. We believe the second wave of infections in the US and Japan prompted MAS to make the pre-emptive move.


Earnings capacity of Singapore banks unaffected.

  • We maintain our earnings forecast for the upcoming 2Q20 results. We expect DBS to report net profit of S$1,079m for 2Q20, down 32.7% y-o-y and down 7.4% q-o-q. We expect OCBC to report net profit of S$935m for 2Q20, down 23.6% y-o-y but up 33.9% q-o-q.


Where are the support levels for Singapore Banks share price?

  • For the near term, we expect to see kneejerk selling pressure on Singapore banks’ stocks. Based on required dividend yield of 4%, which is about 1SD above long-term mean, we see buying support for DBS at S$18.45, OCBC at S$7.95 and UOB at S$19.50.


DBS (SGX:D05) BUY/ Target Price: S$23.12

  • We expect DBS's new NPLs of S$3,882m (previous: S$3,300m) and NPL ratio to hit 2.95% (previous: 2.81%) in 2021. We cut our 2021 net profit by 5.1%.
  • Our target price of S$23.12 is based on 1.13x 2021F P/B, derived from the Gordon Growth model (ROE: 8.6%, COE: 7.75%, Growth: 1.5%).


OCBC (SGX:O39) BUY/ Target Price: S$23.12

  • We expect OCBC's new NPLs of S$2,991m (previous: S$2,542m) and NPL ratio to hit 2.72% (previous: 2.55%) in 2021. We cut our 2021 net profit by 4.8%.
  • Our target price of S$11.22 is based on 1.0x 2020F P/B, derived from the Gordon Growth model (ROE: 7.7%, COE: 7.75%, Growth: 1.0%).


Sector Catalysts

  • Banks are yield plays. DBS and OCBC provide respective 2020 DPS of S$0.87 and S$0.32.
  • While there is no formal guidance, we have tentatively assumed that 2021 DPS would be 80% of 2019 DPS. DBS provides dividend yield of 4.3% for 2020 and 4.4% for 2021. OCBC provides dividend yield of 3.6% for 2020 and 4.7% for 2021. See DBS Dividend History, OCBC Dividend History, UOB Dividend History.
  • Recovery of the Singapore economy on reopening post Circuit Breaker.


Risks

  • A prolonged COVID-19 pandemic.
  • Escalation of geopolitical tension and trade conflict between the US and China.


Singapore Banks






Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2020-07-30
SGX Stock Analyst Report NOT RATED MAINTAIN NOT RATED 99998.000 SAME 99998.000
BUY MAINTAIN BUY 23.12 DOWN 24.800
BUY MAINTAIN BUY 11.22 DOWN 11.580



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