Singapore Banks - RHB Invest 2020-12-23: Expect Lacklustre Toplines In 2021; NEUTRAL


Singapore Banks - Expect Lacklustre Toplines In 2021; NEUTRAL

Maintain NEUTRAL rating; Top Pick – DBS

Stay NEUTRAL on SG banks.

  • SG banks are expected to emerge from a challenging year in 2020 with a 19% recovery in aggregate net profit, lifting sector ROE to 8.4% in FY21F (FY20F: 7.5%). NPLs are expected to rise further in 2021 as relief programmes expire, but frontloading of provisions in 2020 should mean lower credit costs in the year ahead.
  • Positive news on COVID-19 vaccines saw SG banks rise a sharp 13% between 9 Nov and 24 Nov, with the sector’s P/BV reverting to 1.1x from a low of 0.8x in Apr 2020. Vaccine-induced optimism will likely support a further rotation into cyclical stocks, but risks from an uneven economic recovery and lingering impact from the pandemic point to a need to stick with banks with high provision buffers and robust capital.

Top Pick: DBS.

  • DBS is our pick for SG banks. Aggressive frontloading of provisions has bumped up LLR to 117%, providing comfortable headroom and sustained ROE recovery in FY21F-22F. Our GGM-derived target price of S$30.00 is based on a GGM-derived P/BV of 1.25x, near +1SD from its historical mean.

Managing asset quality remains the priority

Asset quality to hold up well.

  • Varying loan moratorium and repayment assistance programmes across the region have resulted in low visibility on asset quality. Loans under relief programmes at DBS and OCBC stood at c.5% at end-Sep 2020, while UOB had a higher 10% due to its bigger exposure to Malaysia.
  • With sector NPLs rising 7.8% year-to-date-Sep 2020 (2019: +2.2% y-o-y) due to the economic downturn, we have conservatively assumed NPLs would be up a sharper 15% y-o-y by end-2020 and increase a further 19% in FY21F. Still, NPL ratio would remain benign at 1.64% in FY20F (FY19: 1.49%) and 1.87% in FY21F. The additional provisions boosted LLR to a high of 104.7%, and will stay comfortable at 99.7% in FY21F.
  • In the 3Q20 results season, UOB lowered its credit cost guidance to 30-40bps (from 60bps) for FY21F, citing optimism that asset quality will be better than anticipated. On the flipside, DBS and OCBC maintained their 2-year credit cost guidance – S$3-5bn impairment charges for DBS and 100-130bps for OCBC (with lower end of range being the more likely outcome). DBS and OCBC remain cautious, concerned over recovery in the real economy and borrowers’ repayment behaviour post-moratorium.

NIM to stay low

NIM has stabilised, no recovery in sight yet.

  • Short-term rates in Singapore bottomed in mid-Jun 2020 and have stabilised since Sep 2020. Reflecting expectations that short-term rates would likely remain steady, banks indicated that 3Q20 exit NIM can be sustained in 4Q20. For 9M20, SG banks’ average NIM compressed by c.20bps y-o-y to 1.63% on the 137bps year-to-date decline in the Singapore Interbank Offered Rate (SIBOR) and the Swap Offer Rate (SOR).
  • To support NIM, banks have been gradually lowering deposit rates as well as working to reduce some of the excess liquidity built up from the robust deposit growth seen in 2020. We believe these efforts would help support NIM from a further decline in 2021.

Loan growth stable.

  • We expect sustained loan demand in 2021 underpinned by the recovery in economic activities. Sector loans are projected to expand by 4.7% in 2021F, relatively stable against the estimated growth of 5.0% for 2020F. We believe the increase would be led by lending to businesses while demand for mortgages remains soft. Of the three banks, DBS and UOB are expected to achieve loan growth of c.5% y-o-y, while OCBC is forecasted to grow its loans at a lower clip of 3.3% y-o-y.

Healthy fee income growth, moderated by lower investment trading gains.

  • Fee income is expected to grow at a healthy 9% y-o-y in 2021F driven by continued growth in fees from wealth management and transaction banking. Still, this will be moderated by lower investment and trading gains, resulting in a modest 2% y-o-y rise in non-II.

Lower credit cost to lift earnings

Bank earnings to recover 19%, ROE at 8%.

  • The pick-up in 3Q20 operating income of SG banks, we believe, can be sustained going into 2021. Economic activities are regaining momentum since the lifting of COVID-19 lockdown measures, while positive news on vaccine developments would help restore confidence.
  • Our forecasts point to a 19% y-o-y rise in FY21F sector net profit with the recovery led mainly by the 36% y-o-y decline in net impairment charges. Credit cost is projected to decline to 44bps from 74bps in FY20F, but remains elevated against the 17-22bps in FY18-19. PIOP is expected to be flattish dampened mainly by the tail-end effect from interest rate cuts.
  • For FY20, sector earnings are estimated to fall 31% y-o-y, impacted mainly by the 226% y-o-y jump in net impairment charges as banks set aside additional provisions for adjustments of macroeconomic variables (MEV) used in the Expected Credit Loss (ECL) model and pre-emptive management overlay.

Singapore banking stock recommendations.

Key risks.

  • Delays in the general availability of COVID-19 vaccines and a resurgence in new cases could derail economic recovery in 2021 and exert pressure on asset quality. Conversely, upside risks will likely come from stronger-than-expected GDP growth and a pick-up in SIBOR and SOR.
  • Digital banks are expected to commence operations in early 2022. We believe these new entrants will not pose a significant threat, as SG banks have been investing to digitalise their operations and offerings.

Singapore Research RHB Securities Research | https://www.rhbinvest.com.sg/ 2020-12-23
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