Singapore Banks - CGS-CIMB Research 2020-12-09: OVERWEIGHT


Singapore Banks - OVERWEIGHT

  • Post-3Q20, we turned positive on Singapore banks on clearer asset quality visibility from encouraging repayment trends post-moratoriums, stabilising NIMs as tailwinds from the Fed rate cuts in Mar 20 filter through banks’ loan books, and improving non-II as transaction volumes pick up amid the re-opening of the broader economy.
  • Singapore banks have outperformed the STI slightly (by 3% 2020 year-to-date, 2% 6-month, flattish 10-month), but we expect earnings upgrades from sustained repayment trends and reduced pessimism on credit quality to further catalyse share prices.
  • Our preference for the sector is UOB, followed by DBS and OCBC. UOB trades at a larger discount compared with its peers, given consensus’ expectations of provisioning risks stemming from its SME book (c.15% of total loans in 3Q20). We think these concerns are priced in and the stock offers a laggard-play opportunity for the sector.

Singapore Banks – Easing asset quality pressures

  • We argue that the worst of asset quality pressures is over for Singapore banks, given the front-loading of guided credit costs (~80-130bp or ~S$2.5bn-5.0bn) in 9M20, amid clearer repayment trends following the end of government-led loan moratoriums in Malaysia and Thailand in Sep-Oct 20.
  • 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.
  • The extension of targeted financial aid by governments (e.g. extension of job support scheme, extended moratorium on SMEs and property-related financing) into FY21F moderates the likelihood of severe and significant credit quality deterioration going forward.

Banks – Wealth management sustainable growth

  • 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 increasingly play pivotal roles in supporting revenue recovery beyond FY20F.
  • We expect Singapore banks’ net profits to recover ~16-27% y-o-y in FY21F on lower provisioning expenses, stabilising NIMs, sustained wealth and treasury income, as well as incrementally better fee income, as social distancing measures are eased further.
  • We think that incremental positive newsflow on COVID-19 vaccines are confidence boosters for sectors most geared to a broad economic recovery, such as financials, supporting a return of sustainable ROEs back to pre-pandemic double-digit levels by FY23F.

Singapore Banks – Valuation

  • Trading at 1.0x FY20F P/BV, Singapore banks are inexpensive at 1 s.d. below their long-term mean and offer significant upside potential with the sequential easing of regional country borders.
  • We expect the recovery to double-digit ROEs to be led by DBS (SGX:D05) (ADD, Target price:S$28.35), improving to 10.1% by FY21F (from ~9% in FY20F) from its finesse in maneuvering the markets, with OCBC (SGX:O39) (ADD, Target price: S$12.52) and UOB (SGX:U11) (ADD, Target price: S$27.72) returning to double-digit ROEs by FY23F.
  • UOB is our top pick for the sector as we look past provisioning risks from the expiry of regional moratoriums. We think that a resumption of higher dividend payouts once the Monetary Authority of Singapore’s (MAS) dividend cap is lifted is a key re-rating catalyst. Strong ~14% CET1 ratios and contained credit migration support our view of the cap expiring in 1Q21F.

Singapore Banks – What could go wrong

Sector NPL ratios overshooting our expected ~2% is a downside risk.

  • Banks could reinstate their previously conservative stance on asset quality if loan repayment trends post-moratoriums are weaker than expected. The government-led forbearance schemes in Malaysia and Thailand have since ended in Sep-Oct 20, while that of Singapore will end at end-Dec 20.
  • That said, we perceive provisioning risks for this portfolio to be low to medium, given the extended government aid (e.g. extended jobs support scheme for harder-hit sectors, reduction of property loan instalments, extension of SME moratoriums), thus staggering out the credit quality pressures on banks.

Longer-term disruption from digital banks.

  • We forecast stiffer deposit-taking competition from digital banks (recall ~6.8% 3-month fixed deposit rates when digital banks commenced operations in HK in Jan 20) and mounting pressure on payment-related fees (e.g. loss of interchange fees and float). However, we believe this to only be a longer-term prospect as operations ramp up.
  • The MAS’s aversion to “predatory” practices may also hinder aggressive customer acquisition. Incumbent banks may accelerate IT spending to keep up with the digital players that have been entrenched in the technology space.

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LIM Siew Khee CGS-CIMB Research | Andrea CHOONG CGS-CIMB Research | https://www.cgs-cimb.com 2020-12-09
SGX Stock Analyst Report ADD MAINTAIN ADD 28.350 SAME 28.350