Singapore Banks 3Q20F - CGS-CIMB Research 2020-10-21: Key Focus On Moratorium Trends

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DBS GROUP HOLDINGS LTD (SGX:D05) OVERSEA-CHINESE BANKING CORP (SGX:O39) UNITED OVERSEAS BANK LTD (SGX:U11)

Singapore Banks 3Q20F - Key Focus On Moratorium Trends

• We expect a more pronounced credit cost improvement for DBS/OCBC. UOB should have upper hand in q-o-q NIMs (+2bp) compared to c.-10bp at peers.
• Updates on post-moratorium repayment trends in MY will be key focal point. UOB could see largest reduction given its higher-tiered client segment there.
• Maintain Neutral. We prefer UOB for comparably steady treasury income and bottomed-out NIMs, buoyed by optimism of moderation in NPL guidance.

Improvement in credit costs; moratorium loans should trend lower

• The absence of chunky OSV/corporate impairments should keep specific provisions (SPs) benign, but continued macro overlays should keep credit costs ranging c.63-67bp in 3Q20F.
• Both DBS (SGX:D05) and OCBC (SGX:O39) should see larger q-o-q credit cost improvements given their more aggressive front-loading of provisions in 1H20. Those of UOB (SGX:U11) will likely remain elevated.
• To recap, DBS/OCBC/UOB provided 40-60%/40-50%/15-20% of their guided FY20-21F impairments in 1H20. We expect further tapering in 4Q20F.

Loans under moratorium in Malaysia; a forward asset quality gauge

• The expiry of loan moratoriums in Malaysia at end-Sep 20 and the corresponding repayment trends of this portfolio will likely be a key focus point in 3Q20F in gauging the reliability/conservatism of credit cost guidance provided by banks.
• On balance, we expect repayment trends of OCBC’s and UOB’s Malaysia books to fare relatively well, given the banks’ higher-tiered client segment there (compared to local banks serving mass-market clients). That said, UOB could be a larger beneficiary of improved asset quality indicators given its larger share of Malaysian loans under moratorium (c.S$18bn) vs. OCBC’s (c.S$13.7bn). Optimistically, NPL formation could fare better than guided as well.

NIM pressures still present, although less severe

• Gleaning over MAS industry statistics, 3Q20F loan growth was likely sluggish at c.0.4- 0.8% q-o-q. Benchmark rates declined further, with average 3MLIBOR/SIBOR/SOR down 34bp/29bp/23bp in 3Q20, placing sustained pressure on NIMs.
• On this end, we expect NIM compression of c.10bp/8bp for DBS/OCBC as asset yields reprice at lower rates. In contrast, UOB appears on track for its guided expansion of 2-3bp per quarter in 2H20 as it runs off expensive US$ liquidity built up earlier this year, which resulted in a heftier drag on NIMs compared to peers (1H20 compression of DBS/OCBC/UOB: 24bp/17bp/28bp).

Reiterate Neutral; prefer UOB for optimism in asset quality trends

• We think that impairment and NIM negativity have largely been priced-in at this stage (c.0.8-1.0x FY20F P/BV, ROEs c.7-8%), but a sector re-rating would depend on firmer positive projections of asset quality trends following repayment trends and new take-up of extended moratoriums.
• Capital ratios should remain strong at c.14% on the back of limited credit growth.
• Upside/downside risks: a removal in MAS’s dividend cap/higher-than-expected NPL formation post-moratoriums.
• See
  • DBS Share Price, DBS Target Price, DBS Dividend History.
  • OCBC Share Price, OCBC Target Price, OCBC Dividend History.
  • UOB Share Price, UOB Target Price, UOB Dividend History.

Andrea CHOONG CGS-CIMB Research | LIM Siew Khee CGS-CIMB Research | https://www.cgs-cimb.com 2020-10-21

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