DBS GROUP HOLDINGS LTD (SGX:D05)
UNITED OVERSEAS BANK LTD (SGX:U11)
OVERSEA-CHINESE BANKING CORP (SGX:O39)
DBS & UOB 2Q20 Results - Credit Cost Not Alarming, NIM Bottoming
- DBS’s net profit of S$1.25bn was in line with our forecast but beat consensus.
- UOB’s net profit of S$703m missed both ours and consensus.
- The key difference between the two banks: DBS had stronger trading and investment gains (S$742m), +4% q-o-q; UOB missed on NIM and credit costs.
- 2Q20 could mark the bottom for NIM as DBS’s fell 24bp and UOB’s 23bp.
- Lower DPS was in line with MAS guidance (DBS: S$0.18, UOB: S$0.39).
DBS: lifted by trading and investment gains
- DBS (SGX:D05)’s 2Q20 net profit of S$1.25bn (+7% q-o-q, -22% y-o-y) was in line with our S$1.26bn but was 11% above consensus’s S$1.13bn estimate. DBS declared interim DPS of S$0.18 for 2Q20, bringing 1H20 DPS to S$0.51 against FY20F guidance of S$0.87. A scrip dividend scheme will be applied to 2Q20 dividends. See DBS Announcements.
- DBS' NIM dipped to 1.62% in 2Q20 (1Q20: 1.86%) as benchmark rates collapsed following the Fed rate cuts in Mar 20. In tandem, NII slipped 7% q-o-q. Fee income fell 18% q-o-q and 11% y-o-y on the back of the regional lockdowns. Wealth stayed fairly strong at S$304m (albeit 25% weaker q-o-q on lower banca sales).
- On a half-on-half basis, brokerage fees, credit card fees and investment banking fees were weaker. This was overall offset by solid treasury income of S$742m (+4% q-o-q) due to stronger net gains on investment securities from its fixed income portfolio.
- ROE was 9.8% (1Q20: 9.2%), CET 1 13.7% (1Q20: 13.9%) and CTI: 40% (1Q20: 38.6%).
- Credit costs were higher than expected at 91bp in 2Q20 (we expected c.60bp). 26bp of these were due to SPs and the rest were set aside as conservative GP buffers.
- Management projects full-year loan growth of 5%, led by non-trade corporate loans (1H20: c.4.7%). Guidance for total allowances of S$3bn-5bn in FY20-21F was maintained. S$1.9bn provisions were taken in 1H20. Full-year NIM expected to be around 1.60% (FY19: 1.89%) and CTI stable at 43% in FY20F.
- We project positive share price performance on stronger-than-expected investment income.
- See DBS Share Price; DBS Target Price; DBS Analyst Reports; DBS Dividend History; DBS Announcements; DBS Latest News.
UOB: missed on NIM and credit cost
- UOB (SGX:U11)’s 2Q20 net profit of S$703m (-16% q-o-q, -19% y-o-y) was below our and consensus’s estimates. 1H20 formed 52%/51% of our/consensus forecasts. 2Q20 DPS was S$0.39 with an option for scrip dividend. We forecast c.S$0.78 in FY20F on the back of MAS’s call for banks to cap dividends. See UOB Announcements.
- UOB's NIMs fell 23bp in 2Q20 (1Q20: 1.71%) as NII dipped 9% q-o-q. This comes on the back of the collapse in benchmark rates; average 3MSIBOR/SOR fell 83/86bp in 2Q20 as 3MLIBOR declined 93bp. We had expected NIM of 1.51%.
- Non-II was flattish q-o-q as weaker credit card (-28% q-o-q) and wealth fees (-34% q-o-q) were offset by stronger trading revenue. Opex was well controlled but CTI rose to 46% as total income dipped 6% q-o-q/-13% y-o-y. ROE was 7.1% (1Q20: 8.8%) and CET 1 14% (1Q20:14.1%).
- Impairment provisions of S$380m translated into 67bp of credit costs (1Q20 36bp through P&L). SPs came up to 13bp – the rest was due to macro overlays. Recall that, in 1Q20, impairment charges of S$286m (or credit cost of 36bp) was taken through P&L but an additional S$260m (or c.33bp) was taken through regulatory loss absorption reserves (RLAR).
- Management expects COVID-19 to be contained by end-2020. There is also upside to NIM in 2H20 (up a few bp) after hitting trough levels and management expects fees to rebound moderately in 2H20 as economies gradually reopen. Credit costs for 2H20 will be around 70bp. This translates into 120-130bp or S$2-3bn over FY20-21F with more pre-emptive allowances to cushion anticipated asset quality weaknesses.
- We forecast weaker share price performance from the lower-than-expected earnings.
- See UOB Share Price; UOB Target Price; UOB Analyst Reports; UOB Dividend History; UOB Announcements; UOB Latest News.
Andrea CHOONG
CGS-CIMB Research
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LIM Siew Khee
CGS-CIMB Research
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https://www.cgs-cimb.com
2020-08-06
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