Singapore Banks - CGS-CIMB Research 2020-11-27: An Injection Of Confidence

Singapore Banks - CGS-CIMB Research | SGinvestors.io DBS GROUP HOLDINGS LTD (SGX:D05) OVERSEA-CHINESE BANKING CORP (SGX:O39) UNITED OVERSEAS BANK LTD (SGX:U11)

Singapore Banks - An Injection Of Confidence

  • Singapore banks have rallied c.13-15% post-3Q20 earnings (see DBS Share Price; OCBC Share Price; UOB Share Price) on clearer asset quality visibility into FY21F. Front-loaded impairments provide NPL buffers.
  • Incremental positive newsflow on COVID-19 vaccines are confidence boosters for equities, supporting a rotation bias towards laggards such as Financials.
  • We raise target prices of Singapore banks, pegging them to average pre-pandemic valuations of c.1.1-1.3x P/BV as market prices in vaccine optimism.
  • UOB is our top pick for the sector as we look past provisioning risks from the expiry of regional moratoriums. Resumption of 50% dividend payout is a catalyst.



Pricing in pre-pandemic valuations of 10-11.5% ROEs, 1.1-1.3x P/BV

  • Clearer guidance from the banks on underlying asset quality trends in 3Q20 briefings gave market some much-needed optimism to look forward to a more normalised earnings scenario in FY21F, underscored by sizeable reductions in credit cost estimates.
  • We outline in our Asia Pacific Strategy Note dated 19 Nov 20 that incremental positive newsflow on COVID-19 vaccine developments is a confidence boost for equities (reducing the equities risk premium), where first-line beneficiaries will likely be laggard sectors of the market most geared towards a broad economic recovery such as financials, energy and real estate.
  • With Singapore banks share prices having rallied c.13-15% post-3Q20 earnings, we argue that the market has started looking past provisioning risks from the expiry of regional loan moratoriums and NIM pressures, and will continue pricing in an accelerated normalisation of economic activity.
  • We think pre-pandemic valuations are a reasonable anchor point for banks to re-rate towards as net profits recover, and peg target prices of Singapore banks to 10- 11.5% ROEs (approaching respective avg. ROEs over FY17-19, implying c.1.1-1.3x P/BV).


We expect asset quality fallout to be contained

  • To recap, OCBC and UOB have recorded encouraging repayment trends post-expiries of loan moratoriums in Malaysia and Thailand, cutting the proportion of group loans under moratorium to c.5% (from c.10%) and c.10% (from c.16%), respectively. Although the short repayment time frames (since expiry of moratoriums in Sep-Oct 20) may cast some doubt over longer-term trends, we believe that the more-affluent client base of Singapore banks in these regions will keep repayment trends intact.
  • Moreover, strong collaterisation levels (OCBC moratorium portfolio: c.93% secured, UOB moratorium portfolio: c.90% secured) moderate our concerns over credit quality implications. We expect fallout from the expiry of moratoriums in Singapore come end-20 to be minimal given the government’s concerted support for individuals/sectors still in need (e.g. extended wage aid, SME moratorium).


Bull case scenario: an acceleration of earnings recovery

  • The c.13-15% share price rally of Singapore banks post-3Q20 earnings leads us to believe that the market has begun to look past asset quality (from moratorium expiries, although NPLs should rise slightly) and NIM negativity (we expect some residual pressure in 4Q20F before stabilising in FY21F), and is trading ahead to a bull case scenario where vaccinations commence earlier (albeit realistically by a quarter at most). The implications on the market are the same – stock prices should go higher with rotation out of pandemic beneficiary stocks to laggard sectors (such as financials) and to emerging markets, but at an accelerated pace.
  • Swifter global economic recovery should lift trade-intensive economies such as Singapore where total exports and imports account for 332% of GDP. We argue that this could bring forward Singapore banks’ return towards pre-pandemic levels of double-digit ROEs over c.FY17-19 as underpinned by lower (and more stable) credit costs post-O&G clean-up and aggressive non-II growth (particularly from wealth management income as ROI from various acquisitions come into effect amid Singapore’s positioning as an economic hub and safe haven as well as stronger new normal levels of treasury income).
  • As the timeline of widespread vaccination remains to be confirmed, we use average valuations over FY17-19 as a more conservative anchor point for the sector re-rating.


Resumption of dividends as a key re-rating catalyst

  • We continue to expect a resumption of dividends to pre-pandemic payout levels (we expect c.52% in FY21F from c.45% in FY20F) in both base and bull cases.
  • We think that NPL concerns from the seasoning of repayments post-expiry of moratoriums are moderated by strong collaterisation levels
    • DBS: c.70% or loans under moratorium is to corporate sector and is mostly secured, remainder are mostly owner-occupied housing loans.
    • OCBC: moratorium portfolio is 93% secured,
    • UOB: moratorium portfolio: c.90% secured,
    and that the estimated rise in NPL ratios towards c.2% (from 1.6% currently) from residual economic stresses and moratorium fallouts to be adequately covered by the hefty front-loading of provisions in FY20F.
  • Concerted efforts of regional governments in rolling out additional support (e.g. targeted/extended moratoriums for selected sectors, reduced property loan instalments, extended jobs support scheme) for individuals/sectors under prolonged financial stress, thereby containing credit migration, and strong CET1 ratios c.14% across Singapore banks underpin our expectation of MAS’s dividend cap expiring in 1Q21 as scheduled.
  • See DBS Dividend History; OCBC Dividend History; UOB Dividend History.

Reiterate Overweight on Singapore Banking sector; we raise target price of DBS, OCBC, UOB to incorporate vaccine optimism






Andrea CHOONG CGS-CIMB Research | LIM Siew Khee CGS-CIMB Research | https://www.cgs-cimb.com 2020-11-27
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