DBS GROUP HOLDINGS LTD (SGX:D05)
OVERSEA-CHINESE BANKING CORP (SGX:O39)
UNITED OVERSEAS BANK LTD (SGX:U11)
Singapore Banks 4Q20 Roundup - Positive Trends Emerging
- We saw positive trends of stabilisation in NIM and easing of credit costs. The exit from the loan moratorium in Singapore and Malaysia has been smooth and orderly. DBS’s, OCBC’s and UOB’s CET-1 CAR at 13.9%, 15.2% and 14.7% respectively are substantially higher than target range of 12.5-13.5%. Thus, banks are well positioned to fully normalise dividend payout to pre-COVID-19 levels. 2022 dividend yield is attractive at 4.9% for DBS and 5.1% for OCBC.
- Maintain OVERWEIGHT.
DBS, OCBC & UOB's 4Q20 Results
- OCBC (SGX:O39) reported net profit of S$1,131m (-9% y-o-y) for 4Q20, which is above expectations.
- DBS (SGX:D05) and UOB (SGX:U11) reported net profits of S$1,012m (-33% y-o-y) and S$688m (-32% y-o-y) respectively, which were in line with expectations.
NIM has bottomed.
- OCBC and UOB saw NIM expansion of 2bp and 4bp q-o-q respectively to 1.56% and 1.57%. The banks have optimised their deposit mix through liability management.
- OCBC’s and UOB’s low-cost current and savings accounts (CASA) increased 30% and 23% y-o-y respectively. Conversely, their fixed deposits contracted 26% and 14% y-o-y. CASA mix also expanded 12ppt and 8ppt y-o-y respectively to 60% and 53.5%. OCBC and UOB saw modest recovery in net interest income of 1.1% and 2.4% q-o-q respectively.
Modest sequential expansion in fee income.
- Wealth management fees were mostly flat on a sequential basis. However, we saw q-o-q expansion for credit cards (DBS: +11% q-o-q, UOB: +15% q-o-q) due to continued recovery of domestic consumption post-circuit breaker that coincided with the festive season. We also saw growth from fund management (OCBC: +4% q-o-q, UOB: +25% q-o-q) due to the buoyant equity market.
OCBC’s asset quality has improved.
Provisions eased qoq after much front-loading in 1H20.
Anticipate a sizeable drop in credit costs in 2021.
- Banks have maintained guidance for cumulative credit costs in 2020-21 at 80-130p (S$3b-5b) for DBS and 100-130bp (S$2.5b- 3.5b) for OCBC. Given that DBS has fortified its balance sheet by recognising provisions of S$3b upfront in 2020, provisions are expected to be lower at S$800m-1,000m in 2021. OCBC is optimistic that provisions could eventually gravitate towards the bottom-end of the range at 100bp (OCBC has already incurred credit costs of 67bp in 2020). For UOB, management guided that credit costs could drop from 57bp in 2020 to 30bp in 2021.
Orderly expiry of loan moratorium.
- DBS’s loans under moratoriums have dwindled from 5.1% to 1.2% of total loans due to the expiry of moratorium in Singapore and Hong Kong (many borrowers did not seek an extension).
- OCBC’s loans under moratorium dropped from 9% to 4% of total loans in 4Q20 (expiry in Malaysia) and further declined to 2% of total loans in Jan 21 (expiry in Singapore).
- UOB’s loans under relief measures were reduced from S$25b (9% of total loans) to S$18b (6% of total loans). About 90% of loans under moratorium are secured by collateral.
Maintain OVERWEIGHT.
- Economic conditions are likely to gradually improve in the next 12 to 18 months. The pace of recovery should pick up with improved consumer sentiment and increased business investment in 2H21. Banks are vying to tap on ASEAN-Greater China intra-regional flows, including cross-border investments to reposition supply chains.
COVID-19 vaccination expected to complete by 3Q21.
- Singapore has approved two COVID-19 vaccines developed by Pfizer-BioNTech and Moderna-NIAID. Singapore received the first shipment of COVID-19 vaccines from Pfizer-BioNTech in Dec 20, while the first shipment from Moderna arrived in Feb 21. Vaccination has commenced, starting with healthcare workers in public and private hospitals in Jan 21, especially those fighting at the frontline. Vaccination for the elderly aged 70 and above started on 22 Feb 21. So far, 240,000 people representing 4.4% of population have received at least one dose of COVID-19 vaccine.
- The commencement of vaccinations would:
- improve business confidence;
- ease safe distancing measures; and
- reduce stress on the corporate sector, thus moderating NPL formation.
- Banks, being cyclical stocks, will benefit from an economic recovery as consumer behaviour and domestic consumption normalise after vaccination commences.
Willing and able to pay more dividends.
- OCBC’s CET-1 CAR has improved 0.8ppt q-o-q to 15.2% in 4Q20. The implementation of an internal ratings-based approach at OCBC Wing Hang has improved OCBC’s CET-1 CAR by 0.5ppt.
- UOB’s CET-1 CAR improved 0.7ppt q-o-q to 14.7% due to decline in risk-weighted assets of 2.2% q-o-q (upgraded models for lending to large corporations).
- In both cases, their CET-1 CARs are substantially higher than their target range of 12.5-13.5%. Thus, banks are well positioned to fully normalise dividend payout to their pre- OVID-19 levels. MAS is expected to announce its guidance on dividends for Singapore banks in May-June.
Singapore banking sector
- Sector catalysts:
- Recovery in earnings and dividends due to decline in credit costs in 2021 and 2022.
- Continued recovery of the Singapore economy accompanied by improvement in business sentiment and easing of safe distancing measures.
- Risks:
- Escalation of geopolitical tension and trade conflict between the US and China.
- Reports on Singapore banks:
- DBS - UOB Kay Hian 2021-02-11: Tapping On New Platforms LVB & Chinese Securities JV.
- DBS Group - UOB Kay Hian 2021-02-19: More Headaches From Lawsuits In India.
- OCBC Bank - UOB Kay Hian 2021-02-25: 4Q20 Quarterly Earnings Crossed The S$1b Mark.
- United Overseas Bank - UOB Kay Hian 2021-02-26: 4Q20 Balance Sheet Well Positioned To Support Re-Opening & Recovery.
- See also
Jonathan KOH CFA
UOB Kay Hian Research
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https://research.uobkayhian.com/
2021-02-26
SGX Stock
Analyst Report
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