DBS GROUP HOLDINGS LTD (SGX:D05)
OVERSEA-CHINESE BANKING CORP (SGX:O39)
UNITED OVERSEAS BANK LTD (SGX:U11)
Singapore Banks - Life After Moratoriums
- Moratoriums offered by Singapore banks expire towards year-end; restructuring and rescheduling are key.
- Extension of moratoriums likely on a targeted basis going forward, if any.
- Extension of dividend cap beyond FY20F a possibility.
- Singapore banks’ valuations remain inexpensive.
Various moratorium expirations coming up.
- An earlier measure introduced at end-March 2020 allowed SMEs to defer principal payments on secured term loans till 31 December 2020 subject to banks’ assessment, and also to extend the loan tenures by up to the principal deferment period.
- Individuals, on the other hand, are also allowed to defer premium payments for life and health insurance till 30 September 2020, while homeowners can also apply to defer either the principal repayment or both principal and interest repayments on property loans till 31 December 2020.
Government measures have kept businesses and jobs afloat, though a worsening employment outlook may happen in 2H20.
- Gradual normalisation of business and trade activities, albeit from a low base in 2Q20 (which coincided with global supply chain disruptions and Singapore’s Circuit Breaker measures), is incrementally positive for the economy. To date, the government’s support in terms of Jobs Support Scheme (JSS) which heavily subsidises wages through the pandemic, as well as various loan moratoriums and reliefs, on top of various financing schemes offered by the banks, has helped keep jobs across sectors afloat.
- Going forward, as JSS gradually rolls off, some businesses may still be unable to churn sufficient cashflow to survive eventually due to structural changes in their respective industries.
- We continue to monitor the credit health of SMEs locally as cessations of business entities slowed in Aug 2020, as we expect some loan losses arising from businesses that become unviable.
Government’s risk-sharing schemes limit some downside for Singapore banks.
- As of May 2020, various financing schemes such as the Temporary Bridging Loan Programme and the Enterprise Financing Scheme in the past Budgets had seen a high take-up, catalysing S$4.5bn of loans so far, and benefitting 5,000 businesses which is > 3x the amount in 2019.
- With the government’s higher risk-share of 90% (prior: 80%) for loans made under Temporary Bridging Loan Programme; the Enterprise Financing Scheme – SME Working Capital Loan; and Enterprise Financing Scheme – Trade Loan for loans initiated from 8 April 2020 until 31 March 2021, this helps to limit some downside for Singapore banks.
Extension of moratoriums likely on a targeted basis going forward, if any.
- If a vaccine remains elusive, we believe asset quality uncertainties are likely to weigh on Singapore banks through FY21F as central banks regionally balance between providing support to industries affected by the pandemic and ensuring banking system stability. Accordingly, ~S$15bn of mortgage deferments, which account for ~7.5% of outstanding mortgages in the system, have been approved. This accounts for nearly 80% of mortgage debt relief applications.
- We believe there may be a case for extension of mortgage moratoriums minimally against increasingly weak employment outlook into 2H20. While we believe the likelihood for large loan losses for mortgages remains low due to low loan-to-values alongside a resilient property market, we see further room for extension of mortgage moratoriums on a targeted basis, for instance, for households which have lost a substantial part of income or jobs.
Breakdown of Singapore banks’ moratorium loans.
- As of 2Q20, c.5%/10%/16% of DBS/OCBC/UOB total loans were under moratorium. Accordingly, it appears that a large portion of loans under moratorium are secured to some extent. We believe that UOB’s Singapore loans under moratorium may be higher as the bank typically has more SME customers compared to its peers.
- As shared in DBS 2Q20 analyst briefing, c.5% of its total loan book are under moratorium, comprising S$12.6bn of SME book and S$5.7bn of consumer book, where 90% of the SME book is secured mostly against property and LTV is generally below 70%.
- c.10% of OCBC’s total loan book are under moratorium, as its Malaysia loans which account for half of the loans under moratorium are on automatic inclusion basis as of June 2020. Of c.S$27bn of loans under moratorium, S$13.7bn pertains to Malaysia exposure, of which 86% are secured, and > 50% of the exposure pertains to housing loans with LTV of ~56% and the remaining exposures are to emerging SMEs with low LTVs and mostly secured. In Singapore, 6.8% of its loans are under moratorium (i.e. S$7.4bn exposure).
- c.16% (S$28bn) of UOB’s total loan book are under moratorium, where Singapore/ Malaysia/ Thailand’s moratorium loans account for 10%/60%/30% respectively, due to Malaysia and Thailand’s automatic inclusion basis. Singapore’s moratorium loans are estimated to be ~S$13bn. According to management, most loans under moratorium are heavily secured.
Banks likely to continue booking provisions in anticipation of further loan losses.
- Credit cost guidance is maintained with DBS/OCBC/UOB guiding for 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 its gross NPL ratio to increase to 2.5% to 3.5% while UOB sees its NPL ratio possibly doubling to 3.2%.
2Q20 saw net interest margins (NIMs) collapse on the back of rate cut; Fed’s latest statement prolongs Singapore banks’ recovery path.
- Following March’s two Fed rate cuts in response to the spread of COVID-19 in the US, which resulted in the repricing of loans on lower benchmark rates through most of 2Q20. During 2Q20, average 3MSIBOR and average 3MLIBOR declined 83bps and 93bps respectively, a multi-fold increase from the previous quarter (25bps and 41 bps respectively). NIM saw a record decline of 16-24bps q-o-q in 2Q20. 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.
- Post the Fed’s updates to its statement on longer-run goals and monetary policy strategy aiming to achieve inflation moderately above 2% after a period of undershoot, short-term rates have priced in no hikes for several years as the hurdle to hike rates are now set much higher. Lower-for-longer rates are likely to weigh on NIMs and return on equity recovery.
- Singapore banks continue to manage cost of funds. 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.
Credit demand remains soft.
- DBS and UOB continue to see some credit demand, while OCBC is expecting muted loan growth for FY20F. We continue to observe some sustainability-linked/green loans and Sora-based loans being rolled out by the Singapore banks. However, as several major infrastructure projects are delayed due to the pandemic, we believe credit demand will remain soft for some time, as July 2020 continues to register a decline in system loans (DBU+ACU) of -1.0% m-o-m, the fourth monthly consecutive decline since March 2020. Year-to-date, system loans are largely flat at 0.3% (since December 2020).
- Singapore banks issue subordinated bonds with attractive
- pricing. On 3 September 2020, OCBC issued a US$1bn tier-two subordinated note due 2030 at 1.832% until call date (September 2025) while UOB priced a US$600m tier-two subordinated note due 2031 at 1.75% until call date (March 2026) as banks leverage on the existing low interest rate environment to refinance maturing subordinated notes ahead of time and improve capital adequacy in the interim.
- Extension of dividend cap beyond FY20F a possibility. The Monetary Authority of Singapore’s call to cap FY20 dividends at 60% of FY19’s was predicated on shoring up capital amid the uncertain economic climate. As of 2Q20, CET1 ratios for DBS/OCBC/UOB stood at 13.7%/14.2%/14.0%, which are strong.
- In our opinion, lower net interest income, coupled with relatively soft credit demand and asset quality uncertainty, opens the possibility of extension of dividend cap into FY21F from a prudent standpoint, given continued uncertainty amidst the pandemic and uneven recovery paths across countries, regions and industries.
Singapore banks’ valuations remain inexpensive.
- Regionally, Singapore banks continue to be the best capitalised, and the valuations remain inexpensive at c.0.8x FY21F P/BV, trading near -2s.d. valuations. We continue to prefer UOB to OCBC as a more defensive pick due to its larger domestic exposure, higher ROE and dividend yield, though OCBC had provisioned ahead compared to UOB in 1H20.
- See
- See PDF report attached below for complete analysis on Singapore Banks and also the peer comparison table of DBS/OCBC/UOB.
- See also recent reports:
Rui Wen LIM
DBS Group Research
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https://www.dbsvickers.com/
2020-09-10
SGX Stock
Analyst Report
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SAME
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