Singapore Banks - CGS-CIMB Research 2020-08-10: Asset Quality Trends Still Within Guidance

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

Singapore Banks - Asset Quality Trends Still Within Guidance

  • Recap of 2Q20: credit costs rose due to front-loading, NIMs collapsed, fees were weaker amid lockdowns, but trading income compensated.
  • SG banks remain firm on FY20-21F credit cost estimates. Expiry of liquidity aid and moratoriums may pressure asset quality, but concerns still contained.
  • We think NIMs are close to bottoming out, limiting sequential pressure. Credit cost concerns also largely priced in but near-term catalysts are limited.
  • Reiterate NEUTRAL. DBS is our top pick for sustained treasury income strength, buffering c.40-60% of guided impairments to date and NII weakness ahead.



DBS most progressive in building up credit costs; UOB the least



UOB projects a modest rise in 2H20 NIMs as it overshoots bottom

  • NIMs fell 16-24bp q-o-q across banks in 2Q20 as benchmark rates are close to bottoming out given the Fed rate cuts in Mar 20.
  • Although the eventual reduction in funding costs is likely to provide some margin reprieve across the sector in 2H20F, UOB could see the largest benefits from this given its lower CASA proportion than peers (c.50% of deposits) and that its 1.43% NIM in 2Q20 significantly overshot its 1.68% NIM trough following the previous round of drastic Fed cuts due to the Global Financial Crisis (GFC).


Sector yields lower at c.4% on MAS’s call to cap dividends

  • NIM and credit cost headwinds will inevitably pressure capital levels, but MAS’s call to cap dividend payouts moderate this risk. See report: Singapore Banks - CGS-CIMB Research 2020-07-30: MAS Caps Dividends At 60% Of FY19 DPS. We like that MAS’s measures emphasise cash conservation amid the uncertainties, but lower yields remove a key investment thesis for the sector.
  • We cut
    • DBS’s FY20F DPS to S$0.87 (from S$1.33),
    • OCBC’s FY20F DPS to c.S$0.318 (from S$0.53) and
    • UOB’s FY20F DPS to c.S$0.78 (from S$1.10)
  • - which translates into c.4% yields (from c.5-6% previously).
  • Prefer DBS, UOB, then OCBC.
  • DBS is confident of sustaining DPS if not for MAS’s guidance; we keep our hopes up for a recovery in DPS come FY21F. Unexpected credit costs and volatile treasury income make OCBC our least preferred, for now.
  • Barring a second wave of COVID-19, we think the negative sentiment has been priced in. Valuations are inexpensive at 0.8-1.0x FY20F P/BV (5-year mean: 1.1-1.2x), but a re-rating would depend on the pace of economic recovery.






Andrea CHOONG CGS-CIMB Research | LIM Siew Khee CGS-CIMB Research | https://www.cgs-cimb.com 2020-08-10
SGX Stock Analyst Report HOLD MAINTAIN HOLD 20.460 UP 18.80
HOLD MAINTAIN HOLD 9.19 UP 8.370
HOLD MAINTAIN HOLD 20.580 UP 19.04



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