Singapore Banks 3Q20 Results Preview - UOB Kay Hian 2020-10-19: Asset Quality Stays Benign. Moderation Of Credit Costs

Singapore Banks - DBS OCBC UOB | SGinvestors.io 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: 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:
    1. improve business confidence;
    2. ease safe distancing measures; and
    3. reduce stress on the corporate sector, thus moderating NPL formation.


Guidance for credit costs maintained.

  • We expect banks’ guidance for cumulative credit costs during 2020-21 to be maintained at
    • 80-130p (S$3b-5b) for DBS,
    • 100-130bp (S$2.5b-3.5b) for OCBC and
    • 100-130bp (S$2.5b-3.5b) for UOB.


DBS (SGX:D05) (BUY/ Target Price: S$23.50)



OCBC (SGX:O39) (BUY/ Target Price: S$11.48)


Singapore Banking Sector Catalysts











Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2020-10-19
SGX Stock Analyst Report BUY MAINTAIN BUY 23.50 UP 22.900
BUY MAINTAIN BUY 11.48 UP 10.820
NOT RATED MAINTAIN NOT RATED 99998.000 SAME 99998.000



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