Singapore Banks 2Q20 Round-up - UOB Kay Hian 2020-08-11: Preparing For Withdrawal Of Moratorium

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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 Round-up - Preparing For Withdrawal Of Moratorium

• The quarter saw severe NIM compression, bearing the brunt of massive cuts in interest rates in the US and around the region. We observed that DBS (SGX:D05) and OCBC (SGX:O39) have achieved significant improvement in CASA ratio and loan-loss coverage.
• DBS and OCBC maintained guidance on credit costs of 80-130bp and 100-130bp, respectively, on a cumulatively basis over 2020 and 2021.
• Maintain OVERWEIGHT. BUY DBS (Target Price: S$22.90) and OCBC (Target Price: S$10.82).

Singapore Banks 2Q20 Round-up

• DBS’ 2Q20 results surpassed expectations due to realised gains from fixed income securities. Conversely, OCBC’s and UOB’s results were below expectations.
• See results note:
  • DBS Group - UOB Kay Hian 2020-08-07: 2Q20 NIM Compression Severe, Asset Quality Benign.
  • Oversea-Chinese Banking Corp (OCBC) - UOB Kay Hian 2020-08-11: 2Q20 Shoring Up Provisions To Address Heightened Uncertainties.
  • United Overseas Bank - UOB Kay Hian 2020-08-07: 2Q20 NIM Compression & Higher Credit Costs.

Severe NIM compression.

• DBS and UOB registered severe NIM compression of 24bp and 23bp respectively to 1.62% and 1.48% in 2Q20 due to aggressive cuts in interest rates by central banks across the region. NIM compression was milder compared to its peers’ at 16bp q-o-q to 1.60% due to its strengthened deposit franchise.

Improvement in CASA ratio.

• DBS recorded deposit growth of 14.3% y-o-y in 2Q20, surpassing OCBC at 4.4% and UOB at 5.9% y-o-y. DBS and OCBC achieved significant improvement in CASA ratio of 7.5ppt and 8.8ppt y-o-y respectively to 66.2% and 56.7%. The two banks benefitted from strong growth in current accounts and savings accounts and were able to cut high-cost fixed deposits by 7% and 18% y-o-y respectively.

Wealth management in the doldrums.

• High net worth private banking clients have turned more risk averse. Closure of branches during the Circuit Breaker period (7 April to 1 June) and reduced branch traffic with tightened safe distancing measures have also affected the sale of investment and bancassurance products. DBS, OCBC and UOB registered declines in wealth management fees of 8%, 22% and 17% y-o-y respectively in 2Q20. DBS and UOB recorded 7% and 9% y-o-y increase in AUM.

Asset quality relatively stable.

• NPL balances increased by a manageable 10%, 12% and 8% h-o-h respectively in 1H20. The deterioration in NPL ratio is also mild at 2bp, 13bp and 7bp respectively to 1.51%, 1.58% and 1.61%.

Beef up provisions to prepare for rainy days.

• DBS and OCBC set aside significant provisions of S$849m (credit costs: 89.9bp) and S$750m (credit costs: 111.7bp) in 2Q20. Their loan-loss coverage ratios have improved 12ppt and 15.3ppt h-o-h respectively to 105.8% and 100.8%. DBS’ general provisions remains elevated at S$560m. OCBC wrote-down the carrying value of existing offshore support vessels NPLs by S$350m (specific provisions). Excluding national oil companies and Singapore-based conglomerates, its exposure to the oil & gas sector was reduced to below 0.2% of total loans.

Moratorium relief.

• DBS, OCBC and UOB have disclosed that moratorium relief accounted for 5% (S$18.3b), 10% (S$27b) and 16% of total loans. Corporate and SME loans accounted for 69%, 50% and 50% of their moratorium relief.

Abiding by MAS’ guideline to cap 2020 DPS.

• DBS declared a DPS of 18 S cents for 2Q20, while OCBC and UOB declared interim dividends of 15.9 S cents and 39 S cents, abiding by MAS’ guideline to cap 2020 DPS at 60% of 2019 DPS.
• All three banks have turned on their scrip dividend scheme. Issue price of new shares are priced at no discount for DBS and UOB and at a 10% discount for OCBC.

ACTION

Maintain OVERWEIGHT.

• Banks have entered the COVID-19 pandemic in a position of strength with DBS’ and OCBC’s CET-1 CAR at 13.7% and 14.2% respectively. However, MAS’ prudent and conservative guidance to cap 2020 DPS will result in dividend yield being restrained in the near term. However, DPS and dividend yield would gradually normalise over time.

Maintains guidance for credit costs.

• DBS and OCBC have maintained their guidance on credit costs at 80-130bp and 100-130bp respectively, on a cumulative basis over 2020 and 2021. The unchanged guidance for credit costs signals that their assessment on outlook remains the same.

SECTOR CATALYSTS

• Banks are yield plays. DBS and OCBC provide a 2020 DPS of S$0.87 and S$0.318. While there is no formal guidance, we have tentatively assumed that 2021 DPS would be 80% of 2019 DPS.
  • DBS provides a dividend yield of 4.2% for 2020 and 4.4% for 2021.
  • OCBC provides a dividend yield of 3.6% for 2020 and 4.8% 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 2Q20 Results

• DBS Group - UOB Kay Hian 2020-08-07: 2Q20 NIM Compression Severe, Asset Quality Benign.
• Oversea-Chinese Banking Corp (OCBC) - UOB Kay Hian 2020-08-11: 2Q20 Shoring Up Provisions To Address Heightened Uncertainties.
• United Overseas Bank - UOB Kay Hian 2020-08-07: 2Q20 NIM Compression & Higher Credit Costs.
• See also
  • DBS Share Price; DBS Target Price;
  • OCBC Share Price; OCBC Target Price;
  • UOB Share Price; UOB Target Price.

Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2020-08-11

SGX Stock Analyst Report BUY MAINTAIN BUY 22.900 SAME 22.900

BUY MAINTAIN BUY 10.820 SAME 10.820

NOT RATED MAINTAIN NOT RATED 99998.000 SAME 99998.000