OVERSEA-CHINESE BANKING CORP (SGX:O39)
UNITED OVERSEAS BANK LTD (SGX:U11)
DBS GROUP HOLDINGS LTD (SGX:D05)
Singapore Banks - Looking Into 2H20
- Singapore banks' 2Q20 net profits declined on lower net interest income (NII), lower fee income and higher provisions.
- Credit cost guidance largely maintained; lower NIMs ahead.
- Keep watch on expiry of loan moratoriums.
- Prefer UOB to OCBC as a more defensive pick due to larger domestic exposure, higher ROE and dividend yield.
DBS, OCBC & UOB 2Q20 results summary:
- Singapore banks saw broad-based net profit declines y-o-y, weighed down by lower net interest income, lower fee income (likely trough for the year as 2Q20 coincides with movement restrictions), and higher provisions, but buffered by stronger non-fee income on favourable market conditions and lower costs.
Largely maintained credit cost guidances through FY21F.
- Credit cost guidance were largely maintained with DBS/OCBC/UOB respect guidance at 80-130bps (S$3-5bn), 100-130bps, and 120- 130bps (S$2-3bn) of credit costs cumulatively over the next two years respectively (previously 50-60bps per year for next two years).
- During 1H20, DBS/OCBC/UOB booked S$1.9bn/S$1.4bn/S$0.7bn of provisions. Note that OCBC estimates gross NPL ratio to increase to 2.5% to 3.5% while UOB sees its NPL ratio possibly doubling to 3.2%.
Lower net interest margins (NIMs) ahead.
- 1H20 NIMs for DBS/OCBC/UOB came in at 1.74%/1.68%/1.60%, while that for 2Q20 were 1.62%/1.60%/1.48%. DBS/OCBC are guiding for full-year NIM at 1.60%/mid-to-high 1.50% range, while OCBC expects both 3Q20 and 4Q20 NIM to see improvements of 2- 3bps q-o-q. While loan books continue to reprice, this may be partially offset by reduction in flagship deposit accounts’ interest rates during 3Q20. Excess CASA also continues to weigh on NIM amidst weaker credit demand, though DBS and UOB continue to see some credit demand, while OCBC is expecting muted loan growth for FY20F.
Keep watch on expiry of loan moratoriums across geographies.
- We upgraded UOB to BUY with a Target Price of S$22.20, representing c.0.9x FY21F P/BV, and maintain our HOLD call on OCBC with a Target Price of S$9.30, representing c.0.8x FY21F P/BV.
- We believe share prices should be capped below 1.0x FY21F P/BV given uncertainty over asset quality. Since the correction in share prices of Singapore banks in mid-June, we believe the market has been increasingly pricing in escalating concerns on the expiry of loan moratoriums across geographies and potential increase in NPLs through 2H20.
- We believe the risk-reward is fairer now and we prefer UOB as a more defensive pick due to its larger domestic exposure, higher ROE and slightly higher dividend yield of 3.9% (OCBC: 3.6%). Meanwhile, we remain cautious over OCBC’s larger exposure to regional SMEs in Hong Kong and Indonesia.
- Downside risks include: Worse-than-expected NPLs and NIMs, ned trade war tensions.
- See summary table of DBS/OCBC/UOB's y-o-y and q-o-q comparison of recent results in PDF report attached below.
Rui Wen LIM
DBS Group Research
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https://www.dbsvickers.com/
2020-08-11
SGX Stock
Analyst Report
9.300
SAME
9.300
22.200
SAME
22.200
99998.000
SAME
99998.000
