Singapore Banks - Maybank Kim Eng 2020-11-24: Too Fast, Too Furious. Downgrade DBS OCBC UOB To SELL.

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

Singapore Banks - Too Fast, Too Furious. Downgrade DBS OCBC UOB To SELL.

The SG banks have re-rated 17% since end-October. See DBS Share Price, OCBC Share Price, UOB Share Price. They have benefitted from the recovery trade catalyzed by newsflow of successful COVID-19 vaccine trials. We believe this is overdone and amplified by liquidity.
Uncertainty that existed in October still remain: NPLs are set to rise as moratoriums ease while borders remain closed, NIMs continue to be under pressure and dividend caps are unlikely to be lifted in 2021E.
Back in June, we saw a similar rally as regional lockdowns were eased. But this was short lived as the expected ‘V’ shape recovery did not materialize. Downgrade DBS (SGX:D05), OCBC (SGX:O39) and UOB (SGX:U11) to SELL.

In the recently concluded 3Q20 results season, the banks largely maintained their bearish credit charge guidance. While we expect overall sector allowances to fall 46% y-o-y in 2021E, this is off a high base. In absolute terms it is still 13% higher than 2017 – the height of the O&M crisis.
Loan moratoriums regionally are keeping NPL visibility low. The re-payment experience following the lifting of Malaysian moratoriums in 3Q20 have been benign, but this is too short a track-record.
Ironically, the moratoriums themselves may have helped customers to preserve cash that was needed to pay the first few installments. Whether customers can sustain this trend may depend on a recovery of underlying macro conditions.
While successful vaccine trials have raised hopes for a rapid economic recovery, effective rollout and reaching herd immunity may only be possible towards end-2021.
We believe the large amounts of liquidity that is currently available because of COVID-19 government stimulus programs may be amplifying market price responses to a vaccine driven recovery.
Following the 3Q20 final GDP release, MKE’s Macro team have upgraded 2021E GDP growth expectations to 4.5% vs. 4% before. This incorporates the recent vaccine breakthroughs. Despite this upgrade, Singapore’s economy is unlikely to get to the level that existed in 2019. The rest of ASEAN is set to experience a similar situation. We estimate NPLs may rise to 2.1% next year – the highest since the GFC.

The sector is under a cap of 60% 2019 dividends. We believe this was done largely to preserve capital and system liquidity amidst uncertainty. We estimate 2021E sector CET1 ratios to fall to 13.9% driven by rising NPLs vs. 14.1% in 2020E. As a result, we believe there is a high chance of MAS rolling forward dividend caps to 2021E given capital ratios should be weaker than when they first imposed the cap.
Clarity on this is unlikely to come before end 1H21, we believe.
The sector is yielding 3.2% in 2021E vs. 6% for large cap REITs, making it un-compelling as a dividend play at this time.
See DBS Dividend History, OCBC Dividend History, UOB Dividend History.

The banks are currently trading near the ceiling of the peak-to-trough channel established this year. The year-to-date trough-peak-trough movements have on average lasted four weeks. The sector is trading at 10.6x 12-month PE, which is 8% shy of its long term mean.
Our multi-stage DDM-based target prices are unchanged, but currently offer 2-8% downside. See
Downgrade DBS to SELL from BUY and UOB and OCBC to SELL from HOLD.
We prefer SGX (SGX:S68) which should benefit from market volatility as well as structural trends that are driving demand for its risk management products. See report: Singapore Exchange - Maybank Kim Eng 2020-11-16: A Different Beat; Initiate Coverage With BUY.
Over the medium term, we believe Singapore banks should benefit from market share gains regionally from North-South supply chain shifts where they can leverage their strong USD liquidity and regional integration. Similarly, their technology platforms and capital levels should enable them to growth their digital banking reach domestically as well as regionally. However, we believe there should be better price-entry points to play these themes going forward.
See PDF report attached below for complete analysis.

Thilan Wickramasinghe Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2020-11-24

SGX Stock Analyst Report SELL DOWNGRADE BUY 24.630 SAME 24.630

SELL DOWNGRADE HOLD 9.290 SAME 9.290

SELL DOWNGRADE HOLD 21.240 SAME 21.240