Singapore Banks 3Q20 Roundup - UOB Kay Hian 2020-11-09: Optimism From Prospects Of Lower Credit Costs In 2021

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

Singapore Banks 3Q20 Roundup - Optimism From Prospects Of Lower Credit Costs In 2021

DBS and OCBC beat expectations.
With the expiry of Malaysia’s automatic loan moratorium on 30 Sep 20, exposure to moratorium loans has dropped from 9% to 5% of total loans for OCBC and 16% to 10% for UOB. Banks have maintained their guidance for credit costs and we see good prospects of credit costs receding lower in 2021.

We expect 2021 dividend yield to improve to 4.8% for DBS and 5.6% for OCBC.
Maintain OVERWEIGHT. BUY DBS (Target Price: S$26.75) and OCBC (Target Price: S$13.48).

DBS (SGX:D05) and OCBC (SGX:O39) reported net profits of S$1,297m (-20.4% y-o-y) and S$1,028m (-12.3% y-o-y) respectively for 3Q20, which were above our expectations of S$1,106m and S$922m.

OCBC has reduced total loans under moratorium from S$23.7b at end-September to S$13.6b at end-October. As a percentage of group loans, the exposure was reduced from 9% to 5%. The bulk of the reduction came from Malaysia where the automatic loan moratorium expired on 30 Sep 20 and moratorium loans were reduced from S$11.8b to S$1.7b, of which businesses (mostly modified repayment) and individuals requesting further relief accounted for S$1.0b and S$0.7b respectively. Over 90% of borrowers have paid their first and second instalments for October and November on time based on the original repayment schedule after expiry of loan moratorium, indicating that asset quality is benign.
Similarly, UOB’s exposure to moratorium loans has reduced from 16% to 10% of total loans on a group-wide basis as automatic loan moratorium has ended in Malaysia and Thailand. In Malaysia, exposure to moratorium loans has dropped from 60% to 10% of total loans. Likewise, exposure to moratorium loans has declined from 30% to 20% for Thailand.

DBS’s and OCBC’s total provisions for 3Q20 dropped 35% and 53% q-o-q respectively. DBS’s and OCBC’s credit costs for 3Q20 eased to 59bp and 52bp respectively, compared to 104bp and 105bp in 1H20.
Banks have maintained guidance for cumulative credit costs in 2020-21 at
- 80-130p (S$3b- 5b) for DBS, and
- 100-130bp (S$2.5b-3.5b) for OCBC.
For DBS, we estimate provisions at S$2.9b in 2020, and to drop to S$1.6b in 2021. OCBC is optimistic that eventual outcome could gravitate toward the bottom-end of the range at 100bp, although management cautioned against uncertainties relating to COVID-19 outbreaks in regional countries.

DBS, OCBC and UOB registered loan growths of 5.1%, 1.7% and 2% y-o-y respectively.
DBS and OCBC suffered NIM compression of 9bp and 6bp q-o-q due to lagged impact from global interest rate cuts in March. NIM appears to be bottoming at 1.53% for DBS, 1.54% for OCBC and 1.53% for UOB.

DBS, OCBC and UOB registered strong sequential rebound in fees of 17.2%, 13.9% and 15.5% q-o-q respectively. This was driven by wealth management (DBS: +25% q-o-q, OCBC: +23% q-o-q and UOB: +41% q-o-q) due to improvement in market sentiment and reopening of branches that were closed during the Circuit Breaker (7 Apr 20 to 1 Jun 20).
Credit card fees also rebounded 22% q-o-q for DBS and 25% q-o-q for UOB due to recovery in consumer spending.

Economic recovery is gaining traction as community transmission remains low and safe distancing measures are progressively eased.
We expect 2021 earnings growth of 4.7% for DBS and 34.2% for OCBC, driven by lower credit costs.
DBS and OCBC provide attractive 2021 dividend yields of 4.8% and 5.6% respectively. We see potential for dividend yield to further improve to 5.9% for DBS and 6.3% for OCBC for 2022 assuming dividends are restored back to pre-COVID-19 levels.

Gradual recovery of earnings and DPS due to decline in credit costs in 2021-22.
Continued recovery in the Singapore economy accompanied by easing of safe distancing measures.

Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2020-11-09

SGX Stock Analyst Report BUY MAINTAIN BUY 26.750 SAME 26.750

BUY MAINTAIN BUY 13.480 SAME 13.480

NOT RATED MAINTAIN NOT RATED 99998.000 SAME 99998.000