Singapore Banking Monthly - Phillip Securities 2021-03-08: Daybreak

DBS GROUP HOLDINGS LTD (SGX:D05) OVERSEA-CHINESE BANKING CORP (SGX:O39) UNITED OVERSEAS BANK LTD (SGX:U11)

Singapore Banking Monthly - Daybreak

February interest rates ticked up from January averages.
Loans grew 0.72% m-o-m in January for their third consecutive month of growth.
Credit outlook improved as loans under moratorium fell.
SGX’s capital-market SDAV/DDAV dropped in February due to Lunar New Year holidays.
Upgrade sector to OVERWEIGHT from NEUTRAL. Banks to benefit from economic recovery via higher fees and commissions and lower credit costs. Top pick is OCBC (SGX:O39) as we expect greater improvements from its wealth-management and insurance franchises.

Current 3M-SIBOR/3M-SOR of 0.44%/0.25% are 3bps higher than their averages in the first two months of FY21. This reflects expectations that the US Fed may raise rates if inflation builds up from excessive stimulus. Short term, interest rates are expected to remain low as loan pricing remains competitive.
Banks’ NIMs averaged 1.54% in 4Q20, 1bp (basis point) higher than 3Q20. This was thanks to better funding-cost management with stable interest rates.

Loans fell 1.09% y-o-y, but marked three consecutive periods of monthly growth at 0.72% in January. Business and consumer loans grew 0.86% and 0.48% m-o-m respectively, the first time both chalked up gains since November 2019.
Monthly growth was observed across the sectors except agriculture, mining & quarrying and credit cards.
While tough pricing competition may weigh on margins, loans are expected to grow healthily in FY21 as we gradually exit the pandemic. Improved consumer and business confidence should support loan growth of mid-to-high single digit of 5-8%, in our estimation.

General provisions averaged 15bps in 4Q20, down from 31bps in FY20. The drop signalled banks’ confidence that credit costs could normalise in FY21.
A better credit outlook is supported by a fall in loans under government relief programmes to 1-2% of loan books from 5% previously. General provision reserves, which grew by 45-55% in FY20, should provide sufficient buffer for any asset-quality deterioration in FY21e.

SGX (SGX:S68)'s preliminary SDAV (Securities Daily Average Volume) for February of S$1,338mn indicates a y-o-y decrease of 3% from S$1,377mn in January 2019. DDAV (Derivatives Daily Average Volume) was hit harder due to market closure on underlying indices celebrating Lunar New Year, with turnover for the top five equity index futures contracting 27.2% in February.
Weakness in the quarter could be attributed to a higher base a year ago when the initial outbreak of COVID-19 caused a spike in transactions. q-o-q, SDAV was stable. Equity index futures might have fallen due to Lunar New Year festivities.
Growth may remain subdued as market activities peaked a year ago during the onset of the pandemic.

Healthy loan growth from recovering regional trade flows and lending sentiment should offset margin compression from competition. Fees and commission income are expected to improve, led by demand for wealth-management services.
Clarity on asset quality could also pave the way for lower credit costs, lifting the main drag on banks’ earnings in the past year.
Given prospects of improved profitability, we recently upgraded OCBC (SGX:O39) to BUY and DBS (SGX:D05) and UOB (SGX:U11) to ACCUMULATE. We also raised our GGM target prices for all 3 banks on the back of lower COE assumptions as risks fall. See reports:
For sector exposure, we prefer OCBC (SGX:O39). It is expected to benefit more from improvements in its wealth-management and insurance franchises along with recovering market conditions.
See PDF report attached below for complete analysis and data tables.
See also:

Tay Wee Kuang Phillip Securities Research | https://www.stocksbnb.com/ 2021-03-08

SGX Stock Analyst Report ACCUMULATE MAINTAIN ACCUMULATE 29.500 SAME 29.500

BUY MAINTAIN BUY 13.650 SAME 13.650

ACCUMULATE MAINTAIN ACCUMULATE 28.700 SAME 28.700