Singapore Banks - CGS-CIMB Research 2020-11-06: Focusing Less On BV Risks, More On ROE

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

Singapore Banks - Focusing Less On BV Risks, More On ROE

• We turn more positive on banks as we expect credit costs to peak in FY20 with asset quality holding steady going forward. Upgrade SG banking sector to OVERWEIGHT.
• Steady fee income growth, ROE improvement, and earnings recovery from lower credit costs could outweigh muted NIM and loan growth, in our view.
• SG banks trade at c.0.8-1.1x CY21F P/BV vs. 13-year average of 1.3x. We see room for upside post COVID. Our preference is UOB (SGX:U11), then DBS (SGX:D05), OCBC (SGX:O39).

Credit cost savings in FY21F set the path for earnings recovery

• All three banks beat expectations in 3Q20 due to NIM (UOB), treasury income (DBS) and lower credit costs (OCBC). The apparent trend in 3Q20 was that the quantum of impairment provisions had peaked in 1H20.
• UOB had lowered its credit cost guidance after the expiry of moratoriums in Malaysia and Thailand given its more significant exposure (11% and 7% loans, respectively) to these countries. Although DBS and OCBC keep their respective two-year S$3bn-5bn and 100-130bp (S$2.8bn-3.5bn) credit cost estimates unchanged, we take comfort that both banks expect lower provisions come 2021F. This suggests that asset quality is not worsening, and ample general provisions and macro overlays taken in 2020 across the sector are sufficient to cover impending NPA formation.
• All in, we expect to see credit costs reducing by c.S$491m-S$1.8bn (30- 63% y-o-y) across banks in FY21F, paving the way for a significant earnings recovery. We do not rule out the potential for write-backs.

NIM likely to stabilise from 4Q20F onwards as base rates bottom

• We expect NIMs to remain under pressure going into FY21F as continued loan repricing transmits through banks’ loan books. However, the pace of margin compression should gradually taper. With an average exit NIM at end-3Q20 of c.1.52-1.53% and 3MSIBOR/SOR/LIBOR stabilising at c.0.4%/0.2%/0.25% in quarter-to-date 4Q20, the downward pressure on base rates should dissipate while funding costs find a floor.
• That said, we do not see scope for a rise in margins in the coming year. Any upside to margins could stem from shifts in the yield curve, or when the Fed fund rates start rising again.

ROE inching up, dividend back in focus

• Having front-loaded on credit costs in FY20F, sustainable ROEs will be back in focus once book value fears evaporate. DBS stands out as we expect ROE to improve to double-digits - above c.10% in FY21F; we estimate OCBC and UOB’s ROEs to improve from c.7-8% to c.9% in FY21F. From an ROE standpoint, valuations of sub-1.0x P/BV may be justified, but we argue that the worst of impairments are over, and look ahead to more normalised scenarios.
• DBS, given its resilient fee income streams, may continue to warrant premium valuations, trading up to its historical mean of 1.2x P/BV. We think OCBC and UOB will likely return to double-digit ROEs by FY23F.

Reports on SG Banks

• Post-3Q20 earnings, we upgraded all three banks to ADD, supporting our sector upgrade from Neutral to OVERWEIGHT. See report:
  • DBS - CGS-CIMB Research 2020-11-07: Provisions Taken Up Front; Upgrade To ADD.
  • OCBC - CGS-CIMB Research 2020-11-07: Capital Build-Up; Upgrade To ADD.
  • UOB - CGS-CIMB Research 2020-11-04: The Worst Could Be Over; Upgrade To ADD.
• See also
  • DBS Share Price; DBS Target Price; DBS Analyst Reports.
  • OCBC Share Price; OCBC Target Price; OCBC Analyst Reports.
  • UOB Share Price; UOB Target Price; UOB Analyst Reports.
• See complete analysis and also comparison charts in PDF report attached below.

Andrea CHOONG CGS-CIMB Research | LIM Siew Khee CGS-CIMB Research | https://www.cgs-cimb.com 2020-11-06

SGX Stock Analyst Report ADD MAINTAIN ADD 25.510 SAME 25.510

ADD MAINTAIN ADD 10.130 SAME 10.130

ADD MAINTAIN ADD 22.520 SAME 22.520