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Singapore Banks - DBS Research 2020-11-26: Recovery Hopes Abound; BUY OCBC , UOB

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

Singapore Banks - Recovery Hopes Abound

  • Singapore banks as proxies to broader economic recovery.
  • Expect sector earnings to grow by 21% y-o-y in FY21F, we have probably passed the worst earnings decline.
  • Maintain BUY on UOB and OCBC; target prices of S$24.80 and S$11 respectively are pegged to ~1x FY21F P/BV.
  • Key risks: Worse than expected global economic recovery, resurgence of COVID-19 cases and lockdowns, lower than expected NIM, deteriorating credit environment.



Singapore banks as proxies to broader economic recovery.

  • We believe that market has largely priced in known negatives, including concerns on asset quality and lower net interest income. Singapore banks are largely viewed as proxies to the broader economic recovery as we are expecting long-end yields to tick up as we see UST curve steepening in the medium term.


Expect Singapore banking sector earnings to grow by 21% y-o-y in FY21F.

  • We expect sector earnings to improve by 21% y-o-y in FY21F, driven primarily by lower provisions as total income is likely to face some pressures from lower interest rates, amid recovering non-interest income.
  • Operating expenses may come in lower than our expectations as Singapore banks embark on cost cutting initiatives, including occupancy cost. We continue to keep watch on expiry of loan moratoriums in Singapore at year-end, as well as expiry of loan moratorium extensions by 1HFY21F.


Trends to watch


Earnings to recover in FY21F, driven by lower provisions.

  • We expect sector earnings to improve by 21% y-o-y in FY21F, driven primarily by lower provisions as total income is likely to face some pressures from lower interest rates, amid recovering non-interest income.

NIM remains under pressure amid improving credit demand.

  • We have pencilled in NIM declines of 2-9bps in FY21F earnings, with declining cost of funds alleviating some of the NIM pressures from lower interest rates. We expect loan growth of 4-5% amid improving credit demand.

Fees and other non-interest income to support topline.

  • Ongoing momentum in fees and other non-interest income post social distancing measures in FY20F should continue into FY21F. We expect ~6-7% y-o-y growth in non-interest income in FY21F, off a low base.

Lower credit costs than previously expected.

  • At this juncture, we believe credit costs have peaked in FY20F, and barring any unexpected deterioration in credit quality, FY21F credit costs may be lower than our expectations. We expect credit costs to decline 22-44bps in FY21F as Singapore banks have largely front-loaded provisions in FY20F.

Expenses well managed.

  • We expect lower discretionary expenses and controlled employee expenses in FY20F aided by conscious cost management and social distancing measures. We assume expenses to be 5-7% higher in FY21F, from a low base, as banks continue to invest in technology infrastructure.

Dividend cap extension is a possibility.

  • We believe there is still the possibility of an extension of the dividend cap in FY21F from a prudent standpoint, as credit relief support measures are in place till 2Q2021 and there is still uncertainty stemming from the pandemic and uneven recovery paths across countries, regions and industries. That said, a decision may only be arrived nearer mid-2021.

Digital banking, partnerships and ecosystems.

  • The award of the new digital bank licenses is expected to take place by the end of FY2020. In an earlier report, we posit that the entry of new digital banks is unlikely to significantly cannibalise Singapore banks’ diversified profit streams: see report: Singapore Banks - DBS Research 2020-09-24: A Whole New Digital World. In the meantime, we expect Singapore banks to continue forging partnerships and ecosystems to extend and entrench their reach.

Focusing on the region.

  • We believe that Singapore banks will continue to focus in the region, tapping on cross-border and supply chain opportunities, with a focus on China and the broader Greater Bay Area, on top of existing businesses in ASEAN and India.


Maintain BUY on UOB and OCBC; clearer signs needed for sustained rerating.

  • We maintain our BUY calls on both UOB and OCBC, as we believe that current valuations are still inexpensive and market has priced in some headwinds from a slower, but recovering economy. Our target prices of S$24.80 and S$11.00 respectively are pegged to ~1x FY21F P/BV, which are at -1S.D. of the respective banks’ average 15-year P/BV.
  • We believe that Singapore banks’ proactiveness in booking S$1.2-2.5bn of provisions as of 9M20, with more provisions expected in 4Q20, paves the way for earnings recovery in FY21F.
  • Further re-rating to 1.2x forward P/B will require clearer signals of economic recovery trajectories, which hinges on the resurgence of COVID-19 cases in other countries and developments in COVID-19 vaccines.
  • We prefer OCBC to UOB as we believe OCBC provides better share price upside at current levels on cheaper valuations, with more provisions written year-to-date. OCBC may also see more income support from its diversified non-interest income into FY21F.
  • See recent reports:


Key risks:

  • Key risks include changes in expectations of global economic recovery trajectory, resurgence of COVID-19 cases and lockdowns, US and Singapore short term and long term rate expectations, sharper than expected decline in NIM, further deterioration in asset quality, as well as extension of dividend cap.

Singapore banking stocks:






Rui Wen LIM DBS Group Research | https://www.dbsvickers.com/ 2020-11-26
SGX Stock Analyst Report NOT RATED MAINTAIN NOT RATED 99998.000 SAME 99998.000
BUY MAINTAIN BUY 11.000 SAME 11.000
BUY MAINTAIN BUY 24.800 SAME 24.800


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