Singapore Banks - Maybank Kim Eng 2021-01-26: Liquidity Gives You Wings; Upgrade DBS OCBC To BUY, UOB To HOLD


Singapore Banks - Liquidity Gives You Wings; Upgrade DBS OCBC To BUY, UOB To HOLD

Stronger growth signals could support momentum

  • Our Negative call in Nov 20 (Singapore Banks - Maybank Kim Eng 2020-11-24: Too Fast, Too Furious. Downgrade DBS OCBC UOB To SELL) has not worked given strong market liquidity and expectations for more stimulus. This momentum is likely to continue, buoyed by continued economic relaxing, targeted support for the vulnerable sectors and higher non-interest income due to market volatility.
  • We raise Singapore banking sector outlook to POSITIVE.
  • We raise DBS (SGX:D05) and OCBC (SGX:O39) to BUY (from SELL) and UOB (SGX:U11) to HOLD (from SELL).
  • Asset quality risks remain elevated, but continued relief measures may see it kicked further down the road. A relaxing of dividend caps in line with other OECD regulators could be a further upside catalyst.

Growth considerations to the forefront

  • The rapid turnaround in China following COVID-19 lockdowns has resulted in 4Q20 GDP beating expectations. Concurrently, we have seen progressive upgrades to its growth expectations in 2021.
  • Strongly rebounding results from US banks driven by trading income as well as reversals of provisions taken earlier in the year are additional positive read-throughs for Singapore Banks. While the sector here is not dependent on trading income as much as US banks (only 9% of income is from trading in Singapore), the market volatility should have lifted overall prospects.
  • Also the Singapore banks have taken large cautionary provisions (74% of 9M20 incremental provisions were General Provisions and RLARs). While the prospects of write-backs are limited in 4Q20, given regional lockdowns and uncertainty, we believe the upside risks are significantly higher as we progress through 2021.
  • We expect Net Interest Margins (NIM) remain pressured near-term given low policy rates regionally. In 4Q20, we expect it to have largely bottomed as asset-yields have re-priced downwards through the year and the banks have been actively pricing down their funding costs by shifting to a higher weightage of CASA deposits. Going forward, there may be upside risks as the sector realizes gapping profits in the midst of a steepening yield curve.
  • Separately, stronger GDP growth expectations regionally should support a rebound in loan growth momentum. We forecast loans to expand 7% y-o-y in 2021E vs 4% y-o-y in 2020E. North Asia should be a key support here, but also improving liquidity demand in ASEAN especially as a result of North-South supply chain shifts could also be catalysts.
  • Low policy rates should support further fee income growth – particularly in wealth & fund management – while volatility may add trading income momentum. Our existing forecasts do not factor these in, pending 4Q20 results. As a result, risks to non-interest income going forward is on the upside, we believe.

Asset quality kicked further down the road

  • We expect NPLs to expand to 2.1% in 2021E (1.7% in 2020E) – the highest levels since GFC. Further, we estimate around 3-4% of system loans are under moratoriums enhancing asset quality risks.
  • On the flipside, the sector is increasing provisions by 3.4x y-o-y in 2020E. It will add 54% more in 2021E to reach a provision coverage of 94%.
  • The 2021 Singapore Budget is expected to be expansionary, but with measures more targeted at COVID-19 frontline sectors – which remain the most vulnerable and where utilization levels are muted. Together with rising economic activity in Singapore under Phase 3, we expect more downside support for asset quality issues going forward.
  • Plus the strong capital and debt markets should also open avenues for further capital raising opportunities – which should lower default risks. Based on feedback from the banks, credit charge guidance is likely to be maintained at around 100-130bps cumulatively for 2020-2021. We believe the risks of an upside surprise to this range is limited at this time.

Upgrade outlook to POSITIVE

  • Since December 2020, OECD banking regulators have begun easing dividend caps imposed at the start of the Pandemic. The US Fed is allowing the larger banks to resume share buybacks while the ECB and BoE are allowing for partial dividend payments subject to profitability and capital caps.
  • In Singapore as well, we believe the regulator may follow a similar cautionary pathway. Hence, we think dividend caps could see gradual easing in 2021. We estimate this to be 80% of 2019 levels (~60% in 2020).
  • Separately, we believe the flush liquidity environment and expectations of additional stimulus is driving cost of equity lower.
  • For our coverage universe, we have updated our cost of equity (COE) assumptions. This was accomplished by using the latest beta readings for the sector from Bloomberg. We note volatility levels have fallen by 12-18% since we last updated beta around 3-years ago. As a result, this has us lowering COE assumptions for the sector by 100-130bps.
  • Pending 4Q20 results reporting starting mid-February, we keep our earnings assumptions unchanged.
  • Together with the changes to COE, the target price of our banks coverage universe has been upgraded. As a result, we
    • upgrade DBS to BUY (from SELL)
    • upgrade OCBC to BUY (from SELL)
    • and UOB to HOLD (from SELL).
  • Improving operational resilience and potential upside from reversals of provisions as well as turnaround in North Asia sees us upgrading the sector view to POSITIVE from NEGATIVE.
  • Currently the sector’s 12-month forward P/B is trading 18% below its long term mean at 1.0x. Just prior to the COVID-19 pandemic, the sector was trading at 1.1x and in past bull-cycles it has reached a high of 1.4x. On a 12-month forward P/E basis, the sector is trading at an 8% discount to history at 10.6x. In past growth cycles this has reached 13x-14x.


  • We believe DBS' North Asia exposure (31% of loans) should be an early beneficiary of China's post-COVID-19 recovery trajectory. The Group is also well positioned to benefit from North-South supply chain relocations given its strong franchises in transaction banking, cash management, IB&A etc.
  • Additionally, DBS' wealth management business should see continued recovery and net AUM inflows as customers seek yield. Domestically, exposure to larger SMEs and corporates and active data-driven monitoring of portfolio health should keep downside shocks to NPLs contained.
  • See DBS Share Price; DBS Target Price; DBS Analyst Reports; DBS Dividend History; DBS Announcements; DBS Latest News.


  • OCBC's execution of its Greater Bay Area strategy should support growth in North Asia (25% of loans). Its recent appointment of Ms. Helen Wong as CEO is a positive catalyst for execution given her deep experience in this region.
  • Separately, its Insurance business should see improved momentum from mark-to-market gains given supportive market conditions. Similarly, its wealth management business should see inflows as regional customers look for yield.
  • OCBC's larger SME exposure poses some risks and this needs to be closely watched.
  • See OCBC Share Price; OCBC Target Price; OCBC Analyst Reports; OCBC Dividend History; OCBC Announcements; OCBC Latest News.


  • UOB should also benefit from improvements in North Asia, but this should be to a lower degree than peers given only 15% loans are booked there. The Group's regional banking model, partially aimed at capturing North-South supply chain flow could be a beneficiary as the global economy recovers. It's larger exposure to the rest of ASEAN should provide upside to loan growth, but risks of lockdowns and disruptions need to be closelyt watched.
  • Domestically, UOB's larger exposure to SMEs may pose downside asset quality risks that need to be watched, we believe.
  • See UOB Share Price; UOB Target Price; UOB Analyst Reports; UOB Dividend History; UOB Announcements; UOB Latest News.

See the 17-page report attached below for complete analysis on Singapore banking sector.

Thilan Wickramasinghe Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2021-01-26
SGX Stock Analyst Report BUY UPGRADE SELL 29.78 UP 24.630