DBS OCBC UOB 4Q20 Earnings Preview - UOB Kay Hian 2021-01-25: NIM Bottomed; Lower Credit Costs Propel Earnings


DBS OCBC UOB 4Q20 Earnings Preview - NIM Bottomed; Lower Credit Costs Propel Earnings

  • 4Q is usually a seasonal lull. We expect DBS (SGX:D05) and OCBC (SGX:O39) to report net profits of S$1,002m (-33.5% y-o-y and -22.7% q-o-q) and S$882m (-29.1% y-o-y and -14.3% q-o-q) respectively for 4Q20.
  • We expect the stock market to take cue from the direction of asset quality and credit costs. In both respects, we prefer OCBC (Target Price: S$14.65), which provides dividend yields of 4.7% and 5.3% respectively for 2021 and 2022.
  • We downgrade DBS (Target Price: S$29.45) to HOLD.
  • Maintain sector OVERWEIGHT.

Singapore Banks' 4Q20 earnings announcements

DBS: Headwinds from deterioration in asset quality.

  • We forecast DBS to report net profit of S$1,002m for 4Q20, down 33.5% y-o-y and 22.7% q-o-q.

Residual impact from previous fall in interest rates.

  • Loan growth is muted at 3.3% y-o-y and 0.8% q-o-q in 4Q20 with slow growth for non-trade corporate loans and sluggishness for residential mortgages. We expect NIM to narrow 5bp q-o-q to 1.47% due to limited room to trim deposit rates (not reliant on fixed deposits).

Fees stable on a sequential basis.

  • We expect total fees & commissions to be flat q-o-q but increase 8.5% y-o-y. We expect wealth management fees to expand 40% y-o-y due to increased customer activities with improvement in market sentiment and risk-on appetite to invest in recovery plays. We expect contributions from cards to decline 18% y-o-y as outbound travel for holidays is curtailed. We expect fees from transaction services (including trade-related services) to be flat q-o-q but decline 8% y-o-y.
  • We expect DBS's net trading income to be lower sequentially due to the usual seasonal weakness (-25% q-o-q) but flat on a y-o-y basis at S$225m.

Credit costs stay elevated.

  • We expect exposure to Huachen Automotive Group based in Shenyang, China, of RMB779m (S$160m) to be recognised as NPL. Thus, we expect DBS's NPL ratio to deteriorate slightly by 0.1ppt q-o-q to 1.7%. We expect credit costs to stay elevated at 62bp in 4Q20, comparable to 59bp in 3Q20.

OCBC: Steady contributions from core businesses and lower credit costs.

  • We forecast OCBC to report net profit of S$882m for 4Q20, down 29.1% y-o-y and 14.3% q-o-q.

Hunkering down on loan growth.

  • Loan growth should be muted at 1.8% y-o-y and 0.3% q-o-q in 4Q20 due to slowdown in corporate loans and residential mortgages, although there were pockets of strength for sustainable finance and restructuring/consolidation/privatisation.

NIM has bottomed.

  • We expect NIM to be stable q-o-q at 1.54% with active management on cost of deposits. OCBC cut the interest rates for its 360 Account three times in 2020.

Fees stable on a sequential basis.

  • We expect OCBC's total fees & commissions to be flat q-o-q but decrease 9.2% y-o-y in 4Q20. Wealth management fees have stabilised this quarter after climbing 22% q-o-q in 3Q20. Loans and trade-related fees are expected to be seasonally softer.

Healthy contribution from insurance.

  • We expect healthy growth in new sales, especially for health insurance policies, driven by heightened risk aversion caused by the COVID-19 pandemic. We do not foresee mark-to-market losses from Great Eastern (SGX:G07)’s investment portfolio for bonds as positive impact from lower credit spreads is offset by negative impact from higher government bond yields. We expect contribution from the insurance business to be stable at S$230m.

Continued moderation in credit costs.

  • We expect credit costs of 45bp in 4Q20, a moderation compared to 105bp in 1H20 and 52bp in 3Q20. OCBC has set aside management overlay of S$450m, which is in excess of the amount required by its macro-economic variable model. Thus, OCBC’s general provisions are already adequate.

COVID-19 vaccination is expected to complete by 3Q21.

  • The Ministry of Health has established an expert panel of doctors and scientists to advise on the selection of vaccine candidates and other logistical issues. Singapore received the first shipment of COVID-19 vaccines from Pfizer-BioNTech in Dec 20. Vaccination has commenced, starting with healthcare workers in public and private hospitals in Jan 21, especially those fighting at the frontline. Next would be the elderly aged 70 and above and those with co-morbidities, followed by those aged 60 to 69. The priority is to protect individuals who are the most vulnerable and more likely to be exposed to COVID-19 infection, while working progressively towards a high level of vaccination in the population.
  • The commencement of vaccination would:
    1. improve business confidence;
    2. ease safe distancing measures; and
    3. reduce stress on the corporate sector, thus moderating NPL formation.
  • Banks, being cyclical stocks, will benefit from an economic recovery as consumer behaviour and domestic consumption normalise when vaccination commences.

Banks to benefit from lower credit costs in 2021.

  • DBS has maintained guidance for cumulative credit costs in 2020-21 at 80-130bp (S$3b-5b), while that for OCBC is 100-130bp (S$2.5b-3.5b). For DBS, we estimate 2020 provisions at S$3.1b, and to drop to S$1.6b in 2021.
  • OCBC is optimistic that credit costs for 2020-21 could gravitate towards the bottom-end of management’s guidance at 100bp. For OCBC, we estimate provisions at S$2.1b for 2020, and to drop to S$0.9b in 2021.


  • Expansion in South India. The amalgamation of Lakshmi Vilas Bank (LVB) with DBS Bank India (DBI) under special powers of the Reserve Bank of India (RBI) and Section 45 of the Banking Regulation Act was completed on 27 Nov 20. LVB has a history of 94 years and a retail and SME customer base. The amalgamation enables DBI to scale up in South India, which has longstanding and close business ties with Singapore. DBS has injected Rs2,500 crore (S$463m) into DBI.
  • Absolute NPLs estimated at S$614m. DBI has taken over LVB’s deposits of Rs20,973 crore (S$3,813m) and net advances of Rs13,505 crore (S$2,455m). LVB is alleged to have serious governance issues and lacked internal control. LVB’s loan book is said to have expanded five times from 2007 to 2019. Bad lending practices and the aggressive expansion into corporate loans have led to a spike in NPL ratio to 25%. LVB suffered losses over the past three years. It has experienced continuous withdrawal of deposits.
  • Existing shareholders have to be compensated? The Madras High Court has directed DBI to provide an undertaking of cash compensation to existing LVB shareholders and to create a reserve fund amounting to face value of LVB shares (estimated at Rs781 crore or S$142m). This is a negative surprise as existing LVB shareholders were supposed to be wiped out under the scheme of amalgamation. The amalgamation was alleged to be on a fast track and was completed within 10 days. Existing shareholders were not given sufficient notice. The ongoing saga creates legal uncertainties for DBI.
  • Assuming MAS does not interfere with banks’ dividend policies, we expect DBS to provide dividend of S$1.08/share for 2021 and S$1.32/share for 2022, which represents dividend yields of 4.1% and 5.0% respectively.
  • Downgrade DBS to HOLD. Our target price of S$29.45 is based on 1.35x 2022F P/B, derived from the Gordon growth model (ROE: 10.1%, COE: 7.75%, Growth: 1.0%). We no longer ascribe a premium to our valuation of DBS. We have conservatively reduced BVPS by S$614m for NPLs carried on LVB’s balance sheet and S$142m for the potential compensation to existing LVB shareholders.
  • See DBS Share Price; DBS Target Price; DBS Analyst Reports; DBS Dividend History; DBS Announcements; DBS Latest News.


Catalysts to Singapore banking sector

  • Recovery in earnings and dividends due to decline in credit costs in 2021 and 2022.
  • Continued recovery of the Singapore economy accompanied by improvement in business sentiment and easing of safe distancing measures.
  • We have assumed that MAS does not interfere with banks’ dividend policy and banks cease to provide scrip dividends in 2021.

Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2021-01-25
SGX Stock Analyst Report HOLD DOWNGRADE BUY 29.45 DOWN 31.480
BUY MAINTAIN BUY 14.650 UP 14.62