Singapore Banks 4Q20 Earnings Preview - CGS-CIMB Research 2021-01-26: Seeking Clarity; Prefer UOB, OCBC, then DBS

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

Singapore Banks 4Q20 Earnings Preview - Seeking Clarity; Prefer UOB, OCBC, then DBS

• We highlight the top few concerns that need to be addressed for a sector re-rating. Among them are MAS’s dividends cap, credit costs, NIM management, and M&A.
• Update on post-moratorium repayments will guide asset quality expectations.
• Reiterate Overweight. We think UOB will outperform peers in 4Q20F given NIM expansion (vs peers’ compression), supplemented by steady non-interest income.

Concern No. 1: MAS – Clarity on banks’ FY21F dividend policy

• Clarity on the lifting of the Monetary Authority of Singapore’s (MAS) cap on bank dividends (at 60% of FY19’s payout) could re-rate the sector.
• Slated to expire in 1Q21, we think there is enough reason not to extend the cap given improving economic activity levels, large impairment buffers built up in FY20F, strong capital ratios (CET-1 ~14%), and targeted government aid beyond the expiry of loan moratoriums across the region.

Concern No. 2: Further cuts in credit costs could unlock earnings upside

• Updates on repayment trends following the expiry of regional loan moratoriums will be crucial in gauging banks’ provisioning trends for FY21F. While hefty front-loading of impairments in FY20F will most likely see y-o-y credit costs improve, we think a sustained decline in group loans under moratorium concurrent with consistent improvements in business transaction volumes and contained NPL accretion could signal further cuts in impairment expenses.
• While we do not envisage Singapore banks making provision write-backs in FY21F as yet given their relatively lower risk appetite vs US banks, we highlight that this could be key in providing earnings upside from FY22F onwards.

Concern No. 3: Making up for the NII shortfall

• Benchmark rates are now hovering close to zero, marking a potential point of inflection for NIMs across Singapore banks. While margin compression has slowed as banks reap the benefits of lower funding costs, we think clear guidance in methods to expand NIMs going forward (e.g. targeting client segments with higher risk-returns) could set one bank apart from its peers.
• As it stands, banks have been relying on wealth and treasury segments to offset NII (non interest income) reduction. Given no change to Fed rates, our base case factors in ~5-15bp of NIM compression across banks in FY21F (FY20F: ~17-27bp compression).

Concern No. 4: M&A – Renewed intentions given the change in leadership?

• OCBC (SGX:O39)’s appointment of Ms. Helen Wong as group CEO come Apr 21 could spark renewed interest in the bank’s M&A ambitions. See report: OCBC - CGS-CIMB Research 2021-01-09: A Fresh Perspective.
• With the OCBC’s capital ratios consistently being higher than peers over past quarters (CET-1 ratio of 14.4% in 3Q20), further capital build-up of ~S$7bn from OCBC Wing Hang’s adoption of the IRB approach (raising CET-1 to ~15% pro-forma), and its practice of offering a discount for its scrip dividend scheme (cash conservation), we think there is scope to reconsider deploying these funds.

DBS (SGX:D05) to report 4Q20 results on 10 February 2021

• We expect DBS to record a net profit of S$969m in 4Q20 (-25% q-o-q/-36% y-o-y) on the back of residual NIM compression amid depressed benchmark rates and elevated impairment provisions given the bank’s consolidation of Lakshmi Vilas Bank (LVB) in India.
• Other key income drivers of fee income, wealth management, and treasury income should generally see an improvement y-o-y from yield-hunting activity given the low interest rate environment, but will likely taper off q-o-q due to seasonally-weaker levels of market activity, and relatively low business transaction volumes as regional movement restriction orders and border closures remained in place. CTI ratio should consequently rise slightly (we expect ~47%) given muted income growth, despite disciplined cost containment over the year.
• We would be expecting lower q-o-q credit costs (given hefty front-loading in 9M20) if not for DBS’s consolidation of LVB in India in Nov 20. For context, LVB has been loss-making over the past 3 years with NPL ratio of ~24.5% as at end-Sep 20 and ~6% credit costs in FY3/20. Although DBS will be injecting S$463m into its Indian operations to support the amalgamation of LVB and DBS Bank India Limited, we do not rule out the possibility of incurring higher impairment expenses to account for concerning exposures in LVB’s books.
• Further, the default of a state-owned automotive player in China could add to impairment figures. We, therefore, expect DBS to record higher credit costs of ~S$620m (or ~65bp) in 4Q20F, bringing full-year credit costs to ~S$3.1bn in FY20F (vs guidance of S$3bn-5bn over FY20-21F).
• We expect residual pressure from lower benchmark rates to filter through DBS’s books in 4Q20F, leading to a much smaller quantum of NIM compression of ~5bp to 1.48% in 4Q20F (vs compression of ~9-24bp in 2Q-3Q20), resulting in full-year NIM of ~1.62% in FY20F (-27bp y-o-y).
• Notwithstanding the margin compression, our expectations of slightly higher loan growth (~0.7% q-o-q in 4Q20F) should prevent a severe NII reduction (4Q20F: -5% q-o-q, -15% y-o-y). The loan growth will likely come from continued non-trade corporate loan demand (drawdown of longer-term facilities) and housing loan drawdowns stemming from the pick-up in bookings in the previous quarter (post-circuit-breaker period beginning Aug 20).
• We expect a dividend of S$0.18 from DBS in 4Q20, in line with MAS’s cap on bank dividends for FY20.
• See DBS Share Price; DBS Target Price; DBS Analyst Reports; DBS Dividend History; DBS Announcements; DBS Latest News.

OCBC (SGX:O39) to report 4Q20 results on 24 February 2021

• We expect OCBC to post a net profit of S$1.0bn in 4Q20 (-2% q-o-q/ -19% y-o-y) as NIM compression and impairment provisions ease, while non-II drivers of insurance, wealth, and treasury income stay steady.
• We expect loan growth to remain muted at ~0.7% q-o-q in 4Q20F as corporates hold back on investment decisions, citing a ‘wait-and-see’ approach’. That said, sustainability-linked loans should make up for some of the sluggish demand. Housing loan activity has picked up, but drawdowns will span over the coming quarters. On balance, the NII decline should slow as NIMs stabilise on the back of active funding cost management.
• Although asset yields remain pressured by low benchmark rates and stiff competition, an improvement in CASA balances and concurrent cuts to deposit rates should hold NIM relatively steady. We expect OCBC's NIMs to compress ~2bp to 1.52bp in 4Q20F, resulting in full-year NIM of 1.6% (-17bp y-o-y).
• Wealth management fees should sustain q-o-q on the back of improved customer activity (+2% q-o-q, -8% y-o-y) while other fee income should sustain as business transaction volumes recover (due to easing of social distancing measures), offsetting some usual 4Q seasonality weakness. We expect treasury income to broadly sustain q-o-q, and do not foresee significant MTM movements. A marginal rise in year-end opex (seasonal) should push OCBC's 4Q20F CTI ratio slightly higher to 45%.
• Clarity on repayment trends following the end of loan moratoriums in Malaysia and Thailand in Sep-Oct 20, as well as that of Singapore in Dec 20, will shape our view of credit costs going forward. That said, we expect limited asset quality deterioration at this stage given the various governments’ extended support measures (targeted loan repayment extension for various sectors/those retrenched, extended jobs support scheme, etc). We expect ~47bp credit cost in 4Q20F.
• We expect a dividend of ~S$0.16 from OCBC in 4Q20, bringing FY20 full-year dividends to S$0.318.
• See OCBC Share Price; OCBC Target Price; OCBC Analyst Reports; OCBC Dividend History; OCBC Announcements; OCBC Latest News.

UOB (SGX:U11) to report 4Q20 results on 25 February 2021.

• We expect UOB to record a net profit of S$691m in 4Q20 (+3% q-o-q/ -32% y-o-y). We think that UOB will likely be the only bank among its peers to offer NIM expansion in 4Q20F.
• Fee income should trend higher in 4Q20F (although not as strong as the rebound seen in 3Q20) from sustained credit card fees (UOB being the largest card issuer in Singapore), while wealth management fees should hold steady on the back of continued customer activity. However, market-related treasury income should dip slightly on year-end seasonal weakness. Slightly lower impairments should keep q-o-q net profits flattish.
• We estimate UOB's NIMs to rise 2bp q-o-q to 1.55% in 4Q20F as funding costs retrace further. Notably, the bank was able to maintain q-o-q NII (+4% q-o-q, -6% y-o-y) expansion as a result of lower benchmark rates (albeit attracting lower asset yields) and the cutting of deposit rates.
• On balance, UOB's full-year NIM should come in at 1.57% (-21bp y-o-y). UOB expects full-year loan growth in the mid-single digits; we expect ~0.7% in 4Q20F, supported by corporate loan growth, with particularly interest from the property segment. Mortgage drawdown may only come in the next 1-1.5 years despite booking volumes being higher.
• UOB expects the bulk of its ~90-100bp credit cost guidance over FY20-21F to be accounted for in FY20F. Following the end of loan moratoriums in Malaysia and Thailand in Sep-Oct 20, we understand that UOB’s share of group loans under moratorium has progressively declined given the bank’s more affluent customer segments there. Pending repayment trend updates post-moratorium in Singapore, we expect some active NPL recognition in 4Q20F which should result in higher specific provision (SPs), although these will be balanced off by lower general provisions (GPs) in 4Q20F. That said, we expect relatively stable impairment provisions of 62bp in 4Q20F, translating into full-year credit costs of 58bp in FY20F.
• We expect a dividend of S$0.39 from UOB in 4Q20, bringing FY20 full-year dividend to S$0.78.
• See UOB Share Price; UOB Target Price; UOB Analyst Reports; UOB Dividend History; UOB Announcements; UOB Latest News.

Reiterate Overweight on Singapore banking sector; preference is UOB, OCBC, then DBS

• We think that UOB could outperform peers on the back of relative NIM expansion (beneficiary of releasing expensive US$ funding and lowest CASA ratio of ~50%), steady non-II drivers (absence of MTM swings) and contained credit costs (likely no corporate loan defaults).
• UOB's valuation is inexpensive at 0.9x FY21F P/BV; we think that clarity on the above could re-rate the stock to its mean of 1.3x P/BV.
• See PDF report attached below for complete analysis.

Andrea CHOONG CGS-CIMB Research | LIM Siew Khee CGS-CIMB Research | https://www.cgs-cimb.com 2021-01-26

SGX Stock Analyst Report ADD MAINTAIN ADD 28.350 SAME 28.350

ADD MAINTAIN ADD 12.520 SAME 12.520

ADD MAINTAIN ADD 27.720 SAME 27.720