DBS GROUP HOLDINGS LTD (SGX:D05)
OVERSEA-CHINESE BANKING CORP (SGX:O39)
UNITED OVERSEAS BANK LTD (SGX:U11)
Singapore Banks - Navigating The Downturn
- Lower asset yields mitigated by declining cost of funds.
- Mixed performance in non-interest income; fee income to rebound strongly from 2Q20’s low base as economies gradually normalise.
- Asset quality surprises unlikely in the interim; support measures extended to 2Q2021.
- Maintain BUY for UOB and HOLD for OCBC.
- We believe potential negatives in 3Q20 results for UOB (SGX:U11) are largely priced in and further improvement in loans under moratorium for UOB should be viewed positively.
- OCBC (SGX:O39) remains a HOLD; we remain watchful over potential M&A activity as it continues to apply a discount on its scrip dividend in 2Q20.
Lower asset yields as loan yields repriced on lower benchmark rates.
- Following the two Fed rate cuts in March 2020 in response to the spread of COVID-19 in the US, average 3MLIBOR and 3MSIBOR continued to slide in 3Q20. During the quarter, average 3MLIBOR and 3MSIBOR declined by 35bps and 28bps respectively, moderating from previous quarter’s record decline of 93bps and 83 bps respectively.
- Recall that previous quarter’s loan yields decline resulted in NIM decline q-o-q of 16 to 24bps. We continue to expect lower asset yields alongside lower loan yields in 3Q20 as changes to board rates tend to lag interest rate movements. Based on our channel checks, credit spreads continue to remain tight during the quarter.
Singapore banks seek to manage cost of funds to buffer against NIM decline.
- From July to Aug 2020, OCBC, DBS and UOB have cut interest rates on their flagship accounts by ~40-70bps. This will lower cost of deposits in 3Q20. 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 current low interest rate environment to refinance maturing subordinated notes ahead of time and improve capital adequacy in the interim.
- Overall, we expect the quarterly decline in NIMs to moderate in 3Q20, as lower asset yields continue to lead decline amidst lowering cost of funds. The exception is UOB, which had previously guided for 2-3bps q-o-q improvement in 3Q20 as the bank has let go of more expensive deposits during the quarter.
- Recall that 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%. According to DBS’ results briefing in 2Q20, DBS saw ~6bps dilution impact on NIM by placing excess deposits during 2Q20 with MAS (S$20 billion of CASA deposits) which is income accretive. DBS/OCBC are guiding for full-year NIM at 1.60%/mid-to-high 1.50% range respectively.
Credit demand continues to be weak; expect weak showing in net interest income.
- During 2Q20, DBS and UOB saw sequential loan growth of ~1% while OCBC’s declined by ~1%. Based on our channel checks, credit demand continued to be weak in 3Q20, hence we expect flattish loan growth across all banks. This compares to 1H20 which saw some credit demand, including new working capital loans.
- We continue to observe some sustainability-linked/green loans and Sora-based loans being underwritten by the Singapore banks. Though there are some new mortgages coming through for new purchases, these loans are likely to be drawn down only in FY21F. Year-to-date 8M20, industry loans contracted 0.4% as outstanding loans continued to decline 0.7% m-o-m from July 2020.
Fee income likely to be better from low base in 2Q20.
- Following the lifting of the circuit breaker on 2 June 2020 and the gradual normalisation of activities, we expect fee income across all banks to show sequentially better performance in 3Q20, driven by strong rebound in wealth management, bancassurance, and cards. Loan-related fees might be weak due to slower loan activities.
- Overall, we believe fee income will see strong q-o-q rebound in 3Q20.
Other non-interest income may be weaker q-o-q, overall non-interest income likely mixed.
- Though US banks’ have seen strong performance in trading income in 3Q20, we believe that trading income across Singapore banks may be weaker q-o-q, due to 2Q20’s high base effect. Recall that DBS benefited from strong trading income in 1H20 due to active realisation of gains in investments as interest rates declined.
- Overall, we expect non-interest income to track better q-o-q for UOB driven by rebound in fee income, offset slightly by lower trading gains. For OCBC, we also expect insurance income to rebound from 2Q20 when sales activities were disrupted, which together with stronger fee income, should support non-interest income.
Asset quality surprises unlikely in the interim; support measures extended to 2Q2021.
- Following the lifting of circuit breaker on 2 June 2020 and gradual normalisation of activities, amid gradual winding down of wage support schemes, we believe that asset quality surprises in terms of material new NPL formation is unlikely in the interim due to ongoing moratorium and relief measures in place, given that the bulk of oil and gas related NPLs in relation to Hin Leong has been largely provided for.
- Further, following MAS’ announcement of extension of support measures for individuals and SMEs facing cashflow difficulties on 5 Oct 2020 (implemented from 2 Nov 2020), stage 3 provisions may only pick up in 1H2021.
UOB might see highest provisions across peers in 3Q20.
- We expect credit cost guidance to be maintained during 3Q20 results briefings. Recall that DBS/OCBC/UOB guided for 80-130bps (S$3-5bn), 100-130bps (~S$3-3.5bn), 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. We believe UOB might see the highest provisions across peers in 3Q20 as UOB lags in terms of actual provisions though UOB has set aside S$260m regulatory loan loss reserve (RLAR) during 1Q20 for general provisions. We expect the other banks to continue to put through general provisions during 3Q20 as management remain prudent.
Improving loans under moratorium.
- As of 2Q20, c.5%/10%/16% of DBS/OCBC/UOB total loans were under moratorium. Going forward, we believe that there is further room for lowering loans under moratorium for OCBC and UOB during and beyond 3Q20, following Malaysia’s transition into a targeted moratorium after the blanket automatic loan moratorium period ended in end-September 2020.
- Malaysia loans, which are mostly secured, accounted for half of OCBC’s loans under moratorium, while accounting for 60% of UOB’s loans under moratorium. UOB management has previously estimated ~10% of loans under moratorium will become NPL; we believe that with Malaysia’s transition into a targeted moratorium, management estimates may be further revised downwards in 3Q20, which should be viewed positively.
Expense control to continue in FY2021F.
- By far, UOB has exercised the most stringent cost control measures, as 2Q20 and 1H20 operating expenses declined 8% y-o-y and 3% y-o-y respectively. Further, in Sep 2020, UOB has announced that salary increases and promotions will be put on hold until further notice.
- We believe that Singapore banks will continue to accelerate expense control measures and keep discretionary expenses in check in FY2021F.
Worst quarterly decline likely over, downside risks to dividends persist.
- Maintain BUY on UOB and HOLD on OCBC.
- Amid asset quality overhang and downside risks to dividends in FY21F, we believe the worst of quarterly earnings decline (q-o-q) is behind us. 3Q20 earnings should see OCBC posting the strongest set of results led by strong fee income and less provisioning, whereas UOB is likely to post a weaker set of results as UOB continues to increase its buffer on general provisions.
- We continue to maintain BUY on UOB as we believe negatives are largely priced in and further improvement in loans under moratorium figures for UOB should be viewed positively.
- We continue to maintain HOLD on OCBC as we remain watchful on potential M&A activity as OCBC continues to apply discount on its scrip dividend policy in 2Q20.
- See
- See PDF report attached below for 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/
2020-10-21
SGX Stock
Analyst Report
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SAME
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SAME
9.300
22.200
SAME
22.200
