DBS GROUP HOLDINGS LTD (SGX:D05)
OVERSEA-CHINESE BANKING CORP (SGX:O39)
UNITED OVERSEAS BANK LTD (SGX:U11)
DBS OCBC 1Q21 Results Preview - Firing On Many Cylinders
- We expect banks to report solid results powered by stabilisation in NIM, robust growth in wealth management fees, strong net trading income and moderation in credit costs. We forecast DBS and OCBC to achieve net profit of S$1,424m (+22.3% y-o-y and +40.7% q-o-q) and S$1,177m (+68.6% y-o-y and +3.9% q-o-q) respectively for 1Q21.
- BUY OCBC (Target Price: S$15.05) and DBS (Target Price: S$33.30), which provide 2022 dividend yields of 4.5% and 4.7% respectively. Maintain OVERWEIGHT.
Singapore Banks to report 1Q21 results
- DBS (SGX:D05) is scheduled to release its 1Q21 results on 30 Apr 21 (Friday), followed by UOB (SGX:U11) on 6 May 21 (Thursday) and OCBC (SGX:O39) on 7 May 21 (Friday).
DBS: Earnings recovery kicks in.
- We forecast DBS to report net profit of S$1,424m for 1Q21, up 22.3% y-o-y (DBS incurred general provisions of S$703m in 1Q20, which were offset by strong net trading income and gain from investment securities) and 40.7% q-o-q.
- Uptick in loan growth supported by healthy pipeline. We expect loans to expand 2.8% y-o-y and 2.0% q-o-q in 1Q21 with broad-based growth from non-trade corporate loans. We expect NIM to remain stable at 1.48%.
- Wealth management and investment banking propels sequential recovery in fees. We expect DBS's total fees & commissions to rebound 12% q-o-q but remain flat y-o-y. Wealth management fees expanded 22% q-o-q and 4% y-o-y due to increased customer activities with buoyant sentiment and risk-on appetite to invest in re-opening and recovery plays. We expect contributions from investment banking to increase 53% y-o-y due to its advisory on the privatisation of GL Limited (SGX:B16), Hi-P International (SGX:H17) and Soilbuild Business Space REIT (SGX:SV3U).
- We expect net trading income to be seasonally stronger at S$350m (+12% q-o-q).
- Asset quality has stabilised. DBS’s loans under moratorium have contracted significantly by 70% from 4.3% to 1.3% of total loans. Thus, NPL ratio is expected to be unchanged at 1.6%. DBS has fortified its balance sheet with general provisions reserves increasing 72% y-o-y to S$4,312m in 2020, which exceeds MAS' minimum requirement by 42%. We expect credit costs to moderate from 61bp in 4Q20 to 37bp in 1Q21.
OCBC: Maintains growth momentum and trajectory.
- We forecast OCBC to report net profit of S$1,177m for 1Q21, up 68.6% y-o-y (low base in 1Q20 caused by specific provisions for oil trader Hin Leong) and 3.9% q-o-q.
- Muted loan growth. We expect loan growth to be muted at 0.5% q-o-q but contract 0.7% y-o-y in 1Q21 due to slowdown in corporate loans and residential mortgages. We expect NIM to be stable at 1.55% with active management on cost of deposits.
- Wealth management fees registered strong sequential rebound. We expect total fees & commissions to have grown 9% q-o-q and 3% y-o-y in 1Q21. This is driven by wealth management fees (53% of total fees & commissions), which have rebounded 20% q-o-q and 3% y-o-y due to buoyant sentiment and recovery of customer activities.
- Healthy contribution from insurance. We do not foresee mark-to-market losses from Great Eastern (SGX:G07)’s investment portfolio as the positive impact from the rally in the equity market is offset by negative impact from higher government bond yields. We expect contribution from insurance business to be stable at S$220m.
- Continued moderation in credit costs. OCBC has set aside management overlay of S$405m, which is above the amount of general provisions required by its macro-economic variable (MEV) model. We expect credit costs of 33bp in 1Q21, a moderation compared with 42bp in 4Q20. NPL ratio is unchanged at 1.5%.
Catalysts for Singapore Banks
- Economic conditions are likely to gradually improve in the next 12-18 months. We see 4 catalysts for Singapore banks:
Higher government bond yield and steepening yield curve.
- Banks are best positioned to benefit from higher bond yields as:
- they foreshadow higher future interest rates, and
- reduce competition from the bond markets as an alternative source of funding for corporate customers.
Economic recovery powered by COVID-19 vaccination underway.
- Singapore’s vaccination programme is expected to be completed by 3Q21. Positive implications include:
- Improving business sentiment and confidence,
- easing of safe distancing measures, and
- reducing 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 will normalise as mass vaccination continues.
Moderation in credit costs.
- The expiry of the loan moratorium was smooth and orderly. DBS’s exposure to loans under moratorium has dwindled from 4.3% to 1.3% of total loans due to the expiry in Singapore and Hong Kong. DBS’s credit costs are expected to drop from 80bp (S$3.0b) in 2020 to 31bp (S$1.2b) in 2021.
- OCBC’s exposure to loans under moratorium has dropped from 9% to 4% of total loans (expiry in Malaysia) and further declined to 2% of total loans (expiry in Singapore). OCBC’s credit costs are expected to drop from 77bp (S$2.0b) in 2020 to 33bp (S$0.9b) in 2021.
Willing and able to pay more dividends.
- DBS and OCBC had strong CET-1 CAR of 13.9% and 15.2% respectively in 4Q20, substantially higher than their target range of 12.5-13.5%. Thus, banks are well positioned to fully normalise dividends to their pre-COVID-19 levels.
- We envisage a two-step process in normalisation of dividend payout back to their pre-COVID-19 levels.
- MAS is expected to announce its guidance on dividends for Singapore banks in May-June.
DBS (SGX:D05) - BUY
- Pursuing growth from sustainable finance. Management has guided for mid single-digit loan growth for 2021. Loan growth will be supported by renewable, clean-energy and green projects, whereby DBS has committed to provide financing of S$50b by 2024, more than twice its previous target of S$20b. DBS closed S$9.6b in sustainable financing transactions in 2020, an increase of 81%. It is the lead coordinator and arranger in consortium of nine banks for PT Halmahera Persada Lygend’s US$625m project financing to build Indonesia’s first High Pressure Acid Leach (HPAL) smelter, which manufactures raw materials for the production of electric batteries for electric vehicles.
- Exposure to loans under moratorium significantly reduced. DBS’s loans under moratorium have contracted significantly by 70%. Loans under moratoriums have dwindled from 4.3% to 1.3% of total loans due to the expiry of moratorium (many borrowers did not seek extension). In Singapore, loans under moratorium declined by 88% for residential mortgages and 76% for SME loans. In Hong Kong, loans under moratorium for large corporates and SMEs declined 52%. Delinquencies were low for borrowers exiting the moratorium in Singapore and Hong Kong.
- Credit costs expected to be much lower in 2021. Asset quality is likely to improve due to the ongoing economic recovery. Management guided for total provisions of about S$4b cumulatively for two years in 2020 and 2021, near the mid-point of its previously guided range of S$3b-5b. DBS has fortified its balance sheet by recognising provisions of S$3b upfront in 2020. Thus, provisions are expected to be much lower at S$800m-1,000m in 2021.
- Maintain BUY. Our target price of S$33.30 is based on 1.49x 2022F P/B, derived from the Gordon Growth model (ROE: 10.2%, COE: 7.75%, Growth: 1.0%).
- See DBS Share Price; DBS Target Price; DBS Analyst Reports; DBS Dividend History; DBS Announcements; DBS Latest News.
OCBC (SGX:O39) - BUY
- New CEO a veteran and heavyweight in banking. Ms Helen Wong has taken over as OCBC’s Group CEO with effect from 15 Apr 20. She was Chief Executive of HSBC Greater China from 2015 to 2019, overseeing HSBC’s businesses in Mainland China, Hong Kong, Macau and Taiwan. HSBC’s earnings are derived mainly from Asia, and Greater China is the biggest growth driver.
- Guidance points to lower credit costs in 2021. Management guided mid single-digit loan growth of 5% for 2021 (2020: +0.5%). Management sees positive impact from improved consumer sentiment and recovery in business investment materialising in 2H21. NIM is expected to stabilise at 1.50-1.55%. Management expects NPL ratio to be at the lower end of guidance of 2.5-3.5% for 2020 and 2021. Credit costs are also expected to be at the lower end of guidance of 100-130bp over the two-year period (2020: 67bp).
- Possesses capacity to pay more dividends. CET-1 CAR has improved 0.8ppt q-o-q to 15.2%, which is substantially higher than its target range of 12.5-13.5%. The implementation of an internal ratings-based approach at OCBC Wing Hang has improved CET-1 CAR by 0.5ppt. While OCBC is currently bloated with excess capital, management reassured investors that there are currently no M&A plans under review. Management intends to maintain dividend payout at 40-50%.
- Maintain BUY. Our target price of S$15.05 is based on 1.25x 2022F P/B, derived from the Gordon Growth model (ROE: 9.5%, COE: 7.75%, Growth: 1.0%).
- See OCBC Share Price; OCBC Target Price; OCBC Analyst Reports; OCBC Dividend History; OCBC Announcements; OCBC Latest News.
Assumption Changes
- We have raised our DBS earnings forecast for 2021 by 1.6% due to robust growth in nd fee income.
Jonathan KOH CFA
UOB Kay Hian Research
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https://research.uobkayhian.com/
2021-04-20
SGX Stock
Analyst Report
33.30
UP
32.950
15.05
UP
14.680
99998.000
SAME
99998.000
