OVERSEA-CHINESE BANKING CORP (SGX:O39)
UNITED OVERSEAS BANK LTD (SGX:U11)
DBS GROUP HOLDINGS LTD (SGX:D05)
Singapore Banks - Onward To Recovery; Maintain BUY On UOB & OCBC
- Maintain BUY on UOB and OCBC with higher target price of S$27.60 and S$12.50 respectively, amidst strong business momentum in January.
- Net Interest Margin (NIM) continues to bottom out; banks look towards improving credit demand.
- Asset quality environment has stabilised from trough levels; credit costs may surprise on the upside.
- Expect broad-based fee income rebound.
Maintain BUY on UOB and OCBC with higher target price
- Maintain BUY on UOB (SGX:U11) and OCBC (SGX:O39) with higher target price of S$27.60 and S$12.50 respectively, amidst strong business momentum in January.
- Our higher target price of S$27.60 and S$12.50 for UOB and OCBC represents ~1.04x FY22F P/BV as we roll over to higher ROE assumptions in FY22F.
- We believe the improved business momentum in January observed across all Singapore banks is likely to be sustained, amidst the more optimistic economic environment and improved sentiment. Current valuations are still undemanding as we look towards earnings recovery led by more stabilised NIM, higher loan growth, and lower credit costs alongside a gradual uptick in long-end yields.
- Aside, we believe higher dividends are on the horizon as management has expressed willingness and ability to commit to higher dividends than FY20’s level.
NIM continues to bottom out; banks look towards improving credit demand.
- DBS/OCBC/UOB saw NIM movements of -4/+2/+4bps q-o-q to 1.49/1.56/1.57%. These mark OCBC/UOB’s first and second quarter of NIM improvement, led by lower cost of funds.
- The worst NIM declines are largely over, with DBS/OCBC/UOB guiding for FY21F NIM to largely stabilise at 1.45-1.50/1.50-1.55/ ~1.57%.
- With DBS/OCBC looking at mid-single-digit loan growth (OCBC originally guided for low mid-single-digit to mid-single-digit loan growth) and UOB targeting high single-digit loan growth, we believe there is scope for net interest income to improve in FY21F as credit demand is expected to pick up sequentially.
Asset quality environment has stabilised from trough levels; proactive provisioning paves way for ROE recovery.
- DBS/OCBC/UOB has booked S$3.1/2.0/S$1.6bn of provisions in FY20, representing 70/67/57bps credit costs, compared to guidance of 80-130bps (FY20-21F), 100-130bps (FY20-21F), 60bps (FY20) and 30-40bps (FY21F) respectively. Accordingly, as we expect NPLs to gradually pick up through FY21F as moratorium and relief extensions end, we believe strong NPA coverage of 110/115/107% and ample general provisions and management overlay cushion paves the way for ROE recovery as special provisions start to pick up.
- The exit of loans under government moratoriums has been largely organised, transitioning into an extended phase. Credit costs may surprise on the upside should the economic environment continue to improve.
Expect broad-based fee income rebound.
- Fee income has picked up from 2Q20’s trough levels across the banks and continues to show good momentum. We expect broad-based fee income growth across the banks on improved momentum of business activities as banks expect wealth management to continue to be a material growth contributor for fees.
- Higher loan growth should also translate into higher loan-related and trade-related fees.
DBS, OCBC & UOB's results comparison
Rui Wen LIM
DBS Group Research
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https://www.dbsvickers.com/
2021-02-26
SGX Stock
Analyst Report
12.50
UP
11.900
27.600
SAME
27.600
99998.000
SAME
99998.000
