DBS GROUP HOLDINGS LTD (SGX:D05)
OVERSEA-CHINESE BANKING CORP (SGX:O39)
UNITED OVERSEAS BANK LTD (SGX:U11)
Navigating Asia Banks - Getting Ready For Takeoff
- We have an Overweight position on the banking sectors under our coverage, as we see turning points for profitability, asset quality and dividend payouts.
- We see the turnaround of these metrics driving a reversal in 2021 of this year’s sizable bank sector share price underperformance.
- Indonesian banks are our top picks among the Asian banks, on their sharp profit and ROE rebound, strong capital ratios and inexpensive valuations.
Singapore Banks: Profitability is turning upwards
We see scope for significant earnings recovery as asset quality doubts dissipate
- The Singapore banks rank third (after Indonesia & Thailand, and before China & Malaysia) among our regional Asian banking coverage universe.
- We see profitability of Singapore banks at the cusp of a turning point on the back of an improvement in asset quality visibility. To recap, our expectations of conservative credit costs (c.80-130bp or c.S$2.5-5.0bn) over FY20-21F had suppressed Bloomberg consensus net profit estimates for this period given the uncertainties stemming from disrupted economic flows globally due to COVID-19.
- That said, positive repayment trends following the expiry of regional moratoriums in Sep-Oct 2020 lead us to believe that the worst of provisioning expenses are over, lifting the cloud of pessimism over net profits in FY21F given the aggressive front-loading of impairments in 9M20.
NIM compression should taper off as benchmark rates bottom out
- Our expected uptrend in q-o-q net profits will likely be supported by a stabilisation of NIMs and sustained strength of non-II drivers. We think that NIMs will reach a trough by end-20, and exhibit a flattish trend into FY21F on the gradual completion of asset repricing from the drastic Fed rate cuts in Mar 2020 filter through the books.
- The tandem decline in funding costs from the bottoming of benchmark rates (3MSIBOR/SOR/LIBOR retraced further to an average c.0.4%/0.2%/0.2% in quarter-to-date 4Q20, from 1.8%/1.5%/1.9% in 4Q19) will help in stemming margin compression.
- We look forward to NIMs staying stable at c.1.5% in FY21F, narrowing a relatively smaller c.5-15bp y-o-y compared to the drastic c.17-27bp y-o-y in FY20.
- A gradual recovery in GDP growth to an estimated +5.3% in FY21F (from -4.9% in FY20F) should lead credit demand (we expect c.5% in FY21F) as corporates resume capex drawdowns, thus providing further baseline support to margins going forward.
Wealth and trading income as an important revenue driver
- Non-interest income will increasingly play a pivotal role in supporting revenue recovery beyond FY20, in our view. More granularly, wealth management income from sustained AUM growth given Singapore’s position as a regional safe haven, and a well-managed treasury book (trending at elevated new normal levels) will be key drivers of this portfolio.
- We also factor in stronger fee income as transaction volumes rise with the continued easing of social distancing measures.
Pathway towards double-digit ROEs back in view from c.16- 27% y-o-y uplift in FY21F earnings
- The sequential improvement in profitability will put sustainable ROEs back in focus as asset quality fears dissipate. The decline in impairment expenses leads us to expect a c.16-27% rise in y-o-y net profit across the Singapore banks in FY21F (FY20: c.26-33% y-o-y decline).
- We expect the recovery to double-digit ROEs to be led by DBS – improving to 10.1% by FY21F (from c.9% in FY20F) from its finesse in maneuvering the markets, and for OCBC and UOB to return to double-digit ROEs by FY23F.
Greater visibility on the outlook for asset quality, with dividends set to recover
Positive repayment trends post-moratoriums lower our credit cost expectations going forward
- We argue that the worst of asset quality pressures are over for the Singapore banks given the front-loading of guided credit costs (c.80-130bp or c.S$2.5- 5.0bn) in 9M20 amid clearer repayment trends following the end of government-led loan moratoriums in Malaysia and Thailand in Sep-Oct 2020. We believe that the repayment trends in these regional economies are a reasonable gauge of the experience to come in Singapore as the moratorium scheme expires at end-Dec 2020.
- Notably, the expiry of these schemes in Malaysia and Thailand shrank OCBC and UOB’s share of loans under moratorium given their respective exposures in these regions. UOB’s share declined the most – from c.16% in c.2Q20 to c.10% currently while OCBC’s dipped from c.10% at end-Jul 2020 to c.5% at end-Oct 2020. That of DBS’s stayed stable at 5% of group loans.
- In addition, the extension of targeted financial aid by governments (e.g. extension of jobs support scheme, extended moratorium on SMEs and property-related financing) into FY21F moderates the likelihood of severe and significant credit quality deterioration going forward. In view of this, banks have either revised their COVID-19 credit costs guidance lower, or prompted the market to expect impairments to trend at the lower end of their previous estimates.
Front-loaded provisioning in 9M20 should adequately cover uptick in NPLs post-moratoriums
- Our upgraded asset quality outlook in FY21F is also rooted by the banks’ aggressive provisioning stance year-to-date, where sizeable proportions (ranging 43- 84%) of the banks’ respective 2-year provisioning estimates have been front-loaded in 9M20 as management overlays over general provisions. The low levels of specific allowances (in 9M20) concur with the positive repayment trends post-moratorium, and consequently rather benign asset quality and lower y-o-y credit costs in FY21F.
- NPL ratios may still trend upwards towards 2-2.5% (from c.1.6% currently) as loan repayments season, but the pre-emptive impairments made in 9M20 should adequately cover the potential rise in specific provisions. Further, we see scope for a writeback in provisioning expenses in an optimistic scenario of credit quality deterioration not materialising, although this will likely be a longer-term opportunistic prospect from FY22F onwards.
- On balance, our credit cost estimates across Singapore banks are reduced to c.25-38bp in FY21F from c.58-79bp in FY20F. We think the potential deterioration of loans under moratorium post-expiries has been captured in estimates. Strong NPA provisioning coverage levels (c.107-111% as at end-Sep 2020) and strong collateralisation levels (boosting NPA coverage levels to over 200%) provide further comfort, and reassurance of a more defensive haven amongst regional banks in terms of asset quality.
Singapore Banks' valuations are attractive, with notable upside potential as catalysts return
Reiterate Overweight on Singapore banks
- As the general economy navigates itself to a new normal post-COVID-19, we look ahead to more normalised business-as-usual scenarios and past hefty provisioning risks. Trading at 1.0x FY20F P/BV, Singapore banks are inexpensive at between the 5-year average mean and 1 s.d. below that mean, and thus offer significant upside potential as banks return to double-digit ROEs with the sequential easing of regional country borders.
- Singapore banks have outperformed relative to the STI so far (by 4% year-to-date, 9% 6-month, 5% 1-month), but we expect earnings upgrades to further catalyse share prices.
- Key downside risks for the sector include inconclusive vaccine developments, which could lead to a prolonged recession, hindering regional repayment prospects, and thus placing upward pressure on NPL ratios, as well as greater-than-expected deposit competition, which could place downward pressure on net interest margins.
We expect MAS’s dividend cap to be lifted in FY21F, and for payout ratios to recover towards ~52%
- Singapore banks’ FY20 dividends have been capped at 60% of FY19’s payout by the Monetary Authority of Singapore. The cap is currently set to expire in 1Q21F, and will be a re-rating catalyst for the sector, in our view.
- While Bloomberg consensus expectations are mixed over the extension of this dividend cap, we do not expect such an extension given the robust capitalisation of Singapore banks (c.14% CET-1 ratio), the staggered expiry dates of various targeted/extended government aid (e.g. extended jobs support scheme until Mar 2021, reduced instalments of property loans pegged at 60% of monthly instalments for up to 9 months, deferment of 80% of principal repayment of SME loans to Mar/Jun 2021 depending on the sector SME operates in), and our expectations of manageable asset quality fall-out from the expiry of Singapore moratorium at end-Dec 2020. Thus, we expect payout levels to recover towards pre-COVID-19 levels of ~52% in FY21F (from 45% in FY20F).
Continue to read...
- Refer to PDF report attached below for complete analysis on Asian banking sector and outlook of Indonesia, Thailand, China & Malaysia banking sector.
Andrea CHOONG
CGS-CIMB Research
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https://www.cgs-cimb.com
2020-12-02
SGX Stock
Analyst Report
28.350
SAME
28.350
12.520
SAME
12.520
27.720
SAME
27.720
