DBS GROUP HOLDINGS LTD (SGX:D05)
OVERSEA-CHINESE BANKING CORP (SGX:O39)
UNITED OVERSEAS BANK LTD (SGX:U11)
Singapore Banks - Bank On Earnings Recovery; Maintain BUY For OCBC & UOB
- Remain positive on Singapore banks; maintain BUY for UOB (SGX:U11) and OCBC (SGX:O39) with higher TPs of S$26.80 and S$11.90 respectively, representing ~1x FY21F P/BV; we believe Singapore banks remain as good proxies to a broader economic recovery.
- We expect broad earnings recovery into FY21F for Singapore banks alongside improving credit demand, higher long-end rates, as banks to continue front-loading provisions in 4Q20 which should support share prices as loan moratoriums begin to taper off.
- Lower cost of funds continues to mitigate asset yield pressures; Net Interest Margins (NIMs) are expected to see a divergent trend amongst Singapore banks in 4Q20.
- 4Q20 non-interest income likely mixed: Credit card fees and wealth management fees may offset weaker loan and trade-related fees; trading income might have peaked in 2Q20.
Base interest rates have largely stabilised.
- While short-term interest rates had continued to come down in 3Q20, rates in 4Q20 largely stabilised, as average 3MLIBOR and 3MSIBOR saw a 3-bp and 2-bp q-o-q decline respectively. Currently, we believe that further downside appears limited.
- Loan yields will continue to be repriced on lower benchmark rates through 4Q20 while FY21F will continue to see repricing of tail-end of floating rate loans and fixed-rate loans.
Singapore banks continued to manage cost of funds into 4Q20.
- MAS announced the extension of support measures for individuals and SMEs on 5 Oct 2020 where selected SMEs can defer 80% of principal repayment up to 30 Jun 2021. We expect to see a gradual increase in repayments from SMEs whose loan moratorium expires in end-December 2020.
- Currently, we believe the asset quality impact, if any, from consumer loans is manageable. With the extensions in place, peak NPL may only be reflected towards 1H21F.
Higher expenses expected in 4Q20; expense control to continue in FY21F.
- From September to December 2020, OCBC and UOB continued to cut interest rates on their flagship accounts by ~17-27bps during the quarter, in October and November respectively (In 3Q20, Singapore banks cut interest rates by ~40-70bps). This should continue to buffer 4Q20 NIM to some extent. DBS and OCBC have subsequently announced interest rate cuts w.e.f January and February 2021.
NIM trend may be divergent in 4Q20.
- Recall that DBS/OCBC/UOB guided for 80-130bps (S$3-5bn), 100-130bps (~S$3-3.5bn), and 60bps and 30-40bps for FY20F/21F respectively (previously 120-130bps [S$2-3bn] of credit costs cumulatively over the next two years).
- While US banks have started to reverse some provisions put through in the earlier part of 2020, we expect Singapore banks to largely continue front-loading provisions in 4Q20, which may pave the way for lower provisions in FY21F (and earnings recovery) should the pandemic situation and economic recovery turn out better than expected.
- We do not expect material new NPAs to show up for OCBC and UOB’s 4Q20 results, as asset quality have largely stabilised in the last quarter.
- We continue to keep watch on developments of Malaysia’s extended movement control order and the impact on Malaysia’s economy, though early 4Q20 operational experience for OCBC and UOB Malaysia showed timely repayment for most loans exiting automatic moratoriums, though a small proportion of customers have requested for further relief. However, downside risk from Malaysia is likely to be mitigated as a large portion of OCBC and UOB’s exposures in Malaysia are secured against real estate.
Some moratoriums begin expiring after December 2020.
- During 3Q20, UOB’s NIM improved 5bps q-o-q to 1.53% as it let go of excess liquidity that weighed on NIM (recall that UOB deliberately built up excess liquidity during April and May). We believe that UOB’s NIM has largely bottomed out as the bank continues to manage its deposit cost and we may see stable-to-positive q-o-q NIM increase in 4Q20.
- Recall that OCBC had earlier guided in 3Q20 for full-year NIM to be 1.55-1.59% (9M20: 1.63%). For OCBC, we believe that repricing of loans is still ongoing as OCBC lagged peers in this respect and hence there might have been further pressures on 4Q20 of a few bps.
- Similarly, DBS had guided during its 3Q20 media briefing for NIM to stabilise between 1.45-1.50% in FY21F (9M20: 1.67%), as it continues to place excess liquidity from inflow of CASA to low-risk assets.
Credit demand continues to be weak; look ahead for some growth in FY21F.
- Industry loan growth (DBU and ACU) continues to contract 0.7% m-o-m. Since end-December 2020, industry loan growth has contracted 1.4% year-to-date. We believe that loan growth across the Singapore banks continued to be muted in 4Q20.
- With better-than-expected advance GDP figures for 4Q20 (-3.8% y-o-y and +2.1% q-o-q saar), alongside recovery from trough in consumer loans, we believe that the economy continues to be on a recovery path and we expect a gradual resumption of economic activities, which should provide some growth for credit demand into FY21F.
Non-interest income likely mixed.
- As retail spending continued to recover m-o-m in 4Q20, we believe credit card fees should continue to see positive momentum.
- In general, wealth management activities are likely to remain robust, given broad-based sustained momentum in market activities. However, positives in credit cards and wealth-management fees may be offset by weaker loan-related fees and trade-related fees, among others.
- For OCBC, we continue to expect insurance income to see good traction as sales activities are likely to see continuous improvement, alongside good mark-to-market gains. In terms of non-fee interest income, we believe trading income might have peaked in 2Q20 for FY20.
- Overall, we expect non-interest income across the banks to be largely flattish.
Asset quality to be largely stable in 4Q20; FY21F may see lower provisions.
- UOB continues to exercise the most stringent cost-control measures, as 3Q20 and 9M20 operating expenses declined 13% y-o-y and 7% y-o-y respectively. We expect higher operating expenses in 4Q20 across the banks due to accruals of variable staff expenses during the quarter and believe that Singapore banks will continue to accelerate expense control measures and keep discretionary expenses in check in FY21F.
Valuation and recommendation
- Look forward to more positives in FY21F, maintain BUY on UOB and OCBC with higher target prices of S$26.80 and S$11.70 respectively, representing ~1x FY21F P/BV.
- See
- We expect broad earnings recovery into FY21F for Singapore banks alongside improving credit demand, higher long-end rates, supported by ample provisions and believe Singapore banks remain as good proxies to a broader economic recovery. Increasing dividends beyond 1Q21F may be a further re-rating catalyst.
- See 20-page report attached below for complete analysis.
Rui Wen LIM
DBS Group Research
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https://www.dbsvickers.com/
2021-01-26
SGX Stock
Analyst Report
99998.000
SAME
99998.000
11.900
UP
11.000
26.800
UP
24.800
