Singapore Banks 1Q21 Preview - CGS-CIMB Research 2021-04-14: Looking Forward To A Strong Quarter

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

Singapore Banks 1Q21 Preview - Looking Forward To A Strong Quarter

We expect DBS and OCBC’s 1Q21F results to be a showdown of wealth management and trading income strength, on the back of robust sentiment.
Loan growth likely rebounded in 1Q21F from 4Q20 contractions while NIMs stabilised q-o-q. We expect 42bp/25bp of credit costs for DBS/OCBC in 1Q21F
We think OCBC’s valuation of 1.1x FY21F P/BV (1 standard deviation below 15-year mean) looks more attractive vs DBS at 1.4x FY21F P/BV (1 standard deviation above 15-year mean).

We expect DBS (SGX:D05) to post 1Q21F net profit of S$1.27bn. Its loan growth momentum is on track for a mid-single-digit expansion in FY21F. Growth was broad-based across non-trade corporate loans, mortgage bookings and trade finance; we expect 1.5% net loan growth in 1Q21F (-0.1% in 4Q20).
As 1Q21F should have seen the tail end of loan repricing from lower benchmark rates, the rebound in q-o-q loan growth likely stabilised NIM around the upper end of the 1.45-1.5% FY21F guided by the bank.
We estimate 1.49% NIM in 1Q21F (flat q-o-q). That said, we expect the steady deposit growth kept LDR at ~80% in 1Q21F.

Fee income momentum was strong in 1Q21F, driven by wealth management income (we project S$376m); if this sustains, full-year growth would hit double-digit.
Credit card income recovered, but not to pre-Covid levels yet given the absence of travel spending.
We estimate lower 1Q21F treasury income y-o-y (but stronger q-o-q) due to a high base from strong investment gains.
Nonetheless, buoyant market sentiment likely shored up trading income, offsetting some of the investment income weakness.

We expect OCBC (SGX:O39) to record 1Q21F net profit of S$1.24bn.
OCBC is broadly on track to mid-single-digit loan growth in FY21F, though the bulk of this would likely come in 2H21F. While corporates are still cautious, overall consumption sentiment is picking up. We expect +0.9% q-o-q growth in 1Q21F (4Q20: -0.7% q-o-q). Asset pricing continues to be very competitive given the demand for high-quality credit.
While 4Q20 NIM expansion was supported by reduced funding costs from active deposit pricing management, we think the bulk of these savings have been realised.
On balance, we expect NII stayed flattish in 1Q21F, translating to stable NIM of ~1.56% (flat q-o-q). We understand that OCBC’s LDR (4Q20: 84%) likely stayed stable in 1Q21F as continued liquidity inflows offset the loan growth rebound.

We expect OCBC’s fee income momentum sustained in 1Q21F, driven by strong wealth management income (we project ~S$300m) amid rising bond yields and steady volumes of customer activity.
Further, we see upside to 1Q21F non-II from stronger insurance and trading income from positive market sentiment. These could be a key differentiating lever for OCBC in 1Q, in our view.
Downside risks to both stocks are a larger-than-expected credit quality deterioration from remaining exposures under moratorium.

Opex likely rose q-o-q, reverting to normal as business activity picks up. We expect some incremental expenses relating to Lakshmi Vilas Bank, but this should be offset by rationalisation of branch floor space. We believe delinquencies from DBS’s moratorium portfolio were contained in 1Q but credit costs may not return to business as usual (BAU) levels (~25bp per quarter) as yet given that uncertainties still surround its overall asset quality.
We expect ~S$400m in impairments or ~42bp in 1Q21F (1Q20: 120bp or S$1.1bn), and for these to gradually taper off over the year.

OCBC’s loans under moratorium had declined to 2% in 4Q20. We understand that repayment trends remain consistent and concerns on potential asset quality deterioration is contained given the collaterised nature of its portfolio.
As OCBC maintains its outlook of recovering economic prospects alongside an absence of chunky provisioning needs, we think a likely return to steady-state impairments is justifiable. We pen in ~25bp of credit costs in 1Q21F (1Q20: 98bp or S$700m).

In our view, DBS and OCBC exhibited similar trends in 1Q21F – a rebound in q-o-q loan growth, stabilised NIMs, stronger q-o-q fee income stemming largely from better wealth management segment, and comparably lower impairment provisions from both q-o-q and y-o-y perspectives.
As such, we project similar trends in 1Q21F – flattish NII growth (DBS: -2% q-o-q, OCBC: +2% q-o-q), comparable total income growth (DBS: +6% q-o-q, OCBC: +8% q-o-q) and similar rise in PPOP (DBS: +12% q-o-q, OCBC: +13% q-o-q).
However, we expect DBS to record stronger 1Q21F net profit growth of 25% q-o-q vs OCBC’s 10% q-o-q. This would largely be due to DBS’s weaker trading income in 4Q20.
On a y-o-y basis, we believe OCBC’s 78% rise in net profit stemmed from large marked-to-market (MTM) losses from its insurance portfolio.

Andrea CHOONG CGS-CIMB Research | LIM Siew Khee CGS-CIMB Research | https://www.cgs-cimb.com 2021-04-14

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