DBS GROUP HOLDINGS LTD (SGX:D05)
OVERSEA-CHINESE BANKING CORP (SGX:O39)
UNITED OVERSEAS BANK LTD (SGX:U11)
Singapore Banks 3Q20 Results Preview - Asset Quality Stays Benign. Moderation Of Credit Costs
- We expect DBS and OCBC to report net profits of S$1,106m (-32% y-o-y and -11% q-o-q) and S$922m (-21% y-o-y but +26% q-o-q) respectively for 3Q20.
- NIM has bottomed, while wealth management fees have rebounded and credit costs moderated on a sequential basis. Asset quality remains benign.
- Preferred BUYs are DBS (Target Price: S$23.50) and OCBC (Target Price: S$11.48) because they have less exposure to moratorium loans but have higher loan loss coverage. Maintain OVERWEIGHT.
DBS OCBC UOB to report 3Q20 results
- DBS (SGX:D05) and OCBC (SGX:O39) are scheduled to release their 3Q20 results on 5 Nov 20.
- UOB (SGX:U11) is expected to announce their 3Q20 results on 4 Nov 20.
DBS: Credit costs and gains from investment securities moderated.
- We forecast DBS to report net profit of S$1,106m for 3Q20, down 32% y-o-y and 11% q-o-q.
Experiencing full impact from lower interest rates.
- Loan growth was muted at 6.5% y-o-y and 0.2% q-o-q in 3Q20 due to the slowdown in drawdown for corporate loans and contraction for residential mortgages. We expect NIM to narrow 13bp q-o-q to 1.49% (exit NIM was 1.58% for 2Q20). We expect NIM to stabilise at the current level as the loan book has fully re-priced the drastic drop in interest rates suffered during March.
Sequential recovery in fees.
- We expect DBS's wealth management fees to rebound 15% q-o-q to S$350m (marginally lower by 2% y-o-y) due to increased customer activities with improvement in market sentiment and risk-on appetite to invest in recovery plays. We expect contributions from cards to rebound 22% q-o-q to S$160m (still 21% lower y-o-y) due to the recovery in domestic consumption post-Circuit Breaker. We estimate that total fees & commissions recovered 12% q-o-q but remained 6% lower compared to the previous year.
- We expect DBS's net trading income and gains from investment securities to be more subdued at S$300m (2Q20: S$352m) and S$100m (2Q20: S$371m) respectively.
Review of cost structure.
- We expect DBS's operating expenses to be relatively unchanged on a q-o-q basis and cost-to-income ratio at 44.5% in 3Q20 (2Q20: 39.8%).
Moderation in credit costs.
- We expect asset quality to be resilient supported by the government’s proactive and massive fiscal stimulus. We expect credit costs at 57bp in 3Q20, a moderation of 33bp q-o-q compared to 90bp in 2Q20.
OCBC: Healthy growth from wealth management and insurance coupled with moderation in credit costs.
- We forecast OCBC to report net profit of S$922m for 3Q20, down 21% y-o-y but rebounding by 26% q-o-q.
Champion of green loans.
- Loan growth is muted at 2.2% y-o-y and 0.3% q-o-q in 3Q20 due to the slowdown in corporate loans and residential mortgages, although there were pockets of strength from green and sustainability-linked loans.
NIM has bottomed.
- We expect NIM to compress by 5bp q-o-q to 1.55% as loans get fully re-priced to reflect the lower interest rates (lagged effect).
- OCBC halved interest rates for 360 accounts to 0.6% for balances up to S$35,000 and 1.2% for balances between S$35,000 and S$70,000 in July, which helped to moderate NIM compression.
Fees rebounded as economy reopens.
- We expect OCBC's total fees & commissions to recover 15% q-o-q but remain 8% lower compared to the previous year. Wealth management fees rebounded 22% q-o-q to S$250m (lower by 6% y-o-y) due to increased customer activities and reopening of branches (32 branches closed during Circuit Breaker were reopened in late-June).
- Contribution from credit cards recovered as consumer spending normalises post-Circuit Breaker.
Healthy contribution from insurance.
- We expect healthy growth in new sales, especially for health insurance policies, driven by heightened risk aversion caused by the COVID-19 pandemic. We do not foresee mark-to-market losses from Great Eastern’s investment portfolio for bonds and equity. We expect contribution from the insurance business to be higher at S$225m, up 10% y-o-y.
Cut discretionary expenses.
- We expect OCBC's operating expenses to decline 6% on a q-o-q basis and cost-to-income ratio at 43.5% in 3Q20 (2Q20: 42.2%).
Moderation in credit costs.
- We expect credit costs of 61bp in 3Q20, a moderation of 50bp q-o-q compared to 111bp in 2Q20, as OCBC has front-loaded provisions in 1H20. After writing down the carrying value of its offshore support vessel NPLs by S$350m (specific provisions) in 2Q20, OCBC has reduced its exposure to the O&G sector (excluding conglomerates) to just 0.3% of total loans.
Approval for COVID-19 vaccine in sight.
- We expect a COVID-19 vaccine to be authorised for emergency use in Nov/Dec 20 and formal approval for general public use in 1Q21. The commencement of vaccination would:
- improve business confidence;
- ease safe distancing measures; and
- reduce stress on the corporate sector, thus moderating NPL formation.
Guidance for credit costs maintained.
DBS (SGX:D05) (BUY/ Target Price: S$23.50)
- Assuming the Monetary Authority of Singapore (MAS) does not interfere with banks’ dividend policies, we expect DBS to provide a DPS of S$1.08 for 2021F and S$1.32 for 2022F, which represents dividend yields of 5.0% and 6.2% respectively. See DBS Dividend History.
- Our target price of S$23.50 is based on 1.13x 2021F P/B, derived from the Gordon growth model (ROE: 8.3%, COE: 7.5%, Growth: 1.5%).
- See DBS Share Price; DBS Target Price; DBS Analyst Reports; DBS Dividend History; DBS Announcements; DBS Latest News.
OCBC (SGX:O39) (BUY/ Target Price: S$11.48)
- Assuming MAS does not interfere with banks’ dividend policies, we expect OCBC to provide a DPS of S$0.50 for 2021F and S$0.56 for 2022F, which represents dividend yields of 5.7% and 6.4% respectively. See OCBC Dividend History.
- Our target price of S$11.48 is based on 1.03x 2020F P/B, derived from the Gordon growth model (ROE: 7.7%, COE: 7.5%, Growth: 1.0%).
- See OCBC Share Price; OCBC Target Price; OCBC Analyst Reports; OCBC Dividend History; OCBC Announcements; OCBC Latest News.
Singapore Banking Sector Catalysts
- Gradual recovery in earnings and DPS due to decline in credit costs in 2021F and 2022F.
- Continued recovery of the Singapore economy accompanied by easing of safe distancing asures.
- Previous report: Singapore Banks - UOB Kay Hian 2020-10-07: Optimal Mix Of Less Moratorium Loans But High Loan Loss Coverage.
- See also recent SGX market update: Singapore Banks Attract Net Institutional Inflows in Early 4Q20.
Jonathan KOH CFA
UOB Kay Hian Research
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https://research.uobkayhian.com/
2020-10-19
SGX Stock
Analyst Report
23.50
UP
22.900
11.48
UP
10.820
99998.000
SAME
99998.000
