Singapore Banks - DBS Research 2021-04-19: Off To A Strong Start

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

Singapore Banks - Off To A Strong Start

Strong loan growth bodes well for net interest income amidst stable Net Interest Margins (NIMs).
1Q21 non-interest income expected to do well driven by trading income and wealth management, and recovery in loan-related and trade-related fees.
Asset quality largely stable post expiry of loan moratoriums; banks to continue writing general provisions in the quarter.
Maintain BUY for UOB and OCBC with higher target price of S$29.20 and S$13.60 on higher ROE assumptions, representing ~1.1X FY22F P/BV, below its 12-year average forward P/BV. We expect firm earnings recovery q-o-q in 1Q21 on improving loan growth, higher non-interest income and lower credit costs.

DBS (SGX:D05) and OCBC (SGX:O39) have introduced interest rate cuts w.e.f. January and February 2021, of up to 10- 70bps on basic tier flagship accounts. As Singapore banks continue to optimise cost of deposits, this should provide support to NIM in 1Q21, though we believe the extent of decline in cost of deposits in 1Q21 is likely to be more pronounced in preceding quarters.

Short-term interest rates have largely stabilised since 4Q20 as average 3MLIBOR and 3MSIBOR saw a 2 bp decline and 1 bp improvement q-o-q respectively. We believe a small portion of fixed-rate loans will continue to reprice downwards on lower base interest rates.
Based on our channel checks, corporate and mortgage loan yields remain competitive, though some banks have started to lengthen the loan book against a steepening yield curve. We believe loan yields should gradually see improvement in subsequent quarters.

Industry loan growth grew 1.2% in Feb 2021 and 3.7% since end- Dec 2020 (year-to-date). This was driven by strong business and consumer lending activities, on the back of gradual recovery in economic and mortgage activities. We believe Singapore banks are on track to meet their FY21F guidance, as credit demand continues to recover.
Bright spots for loan growth include mortgages, loans arising from trade diversification investments, sustainability-related loans, battery and chip supply chains, amongst other corporate loans.

We believe that NIMs are likely to be stable q-o-q across Singapore banks as lower cost of deposits offsets competitive pressures on loan yields. Strong loan growth in 1Q21 and an improving loan-to-deposit ratio will drive net interest income q-o-q amidst stable NIMs for the quarter.

We continue to be positive on non-interest income and expect all Singapore banks to post decent q-o-q traction. Drivers include a sustained momentum in wealth management activities, recovery in loan-related and trade-related fees amidst improving credit demand, strong trading income driven by customer driven activities and profit from treasury. Card fees, while heading higher on improving consumer sentiment, is unlikely to return to pre-COVID levels as yet.
For Great Eastern (SGX:G07), we keep watch on the impact of rising rates on its bond portfolio, which may be partially mitigated by gains from non-bond portfolio, amidst an improving operating outlook.

The exit of loan moratoriums in Singapore has been orderly and we believe that 1Q21 asset quality is largely stable post expiry of loan moratoriums at end Dec 2020, aside from selected SMEs which can defer 80% of principal repayments up to 30 June 2021.
For DBS, loans under moratorium declined from 5% as of end-Sep 2020 to 1% as of end-Jan 2021.
For OCBC, loans under moratorium declined from 4% as of end-Dec 2020 to 2% as of end-Jan 2021.
For UOB (SGX:U11), loans under relief are ~90% collateralised and are supported by government and UOB relief measures, and ESG loan schemes – making up ~6% of its loan book as of end-Jan 2021 (Dec 2020: ~9%).

Recall that DBS/OCBC/UOB booked S$3.1bn/S$2.0bn/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 for DBS/OCBC/UOB.
In the likely absence of chunky specific provisions, Singapore banks will continue to write general provisions during the quarter, though we expect lower credit costs in 1Q21 due to a high base in FY20.

While we expect Singapore banks to incur higher expenses going forward due to higher business-related activities, we believe that firm earnings recovery will continue q-o-q into 1Q21 on improving loan growth (driving better net interest income), higher non-interest income amidst lower credit costs across the banks. We forecast ~23% y-o-y earnings recovery across Singapore banks in FY21F.

We roll forward our target prices to FY22F, arriving at higher target price of S$29.20 and S$13.50 for UOB and OCBC. At ~1.1x FY22F P/BV, this is below its average 12-year forward P/BV multiple. We tweak our earnings by ~+2-3% in FY22F largely on better NIM and loan growth assumptions.
See
- OCBC Share Price; OCBC Target Price; OCBC Analyst Reports.
- UOB Share Price; UOB Target Price; UOB Analyst Reports.

We look towards higher dividends for FY21F on gradual relaxation of dividend caps. A two-stage relaxation seems to be a more likely scenario, where Singapore banks would be initially allowed to pay out up to a percentage of their FY21F net profit prior to the complete removal of restrictions.
We believe that Singapore banks may adjust the high capital buffers through some special dividends from FY22F, subject to asset quality and corporate actions. For more details, please see our previous report: Singapore Banks - DBS Research 2021-04-03: What Is Next For Dividends?

Rui Wen LIM DBS Group Research | https://www.dbsvickers.com/ 2021-04-19

SGX Stock Analyst Report NOT RATED MAINTAIN NOT RATED 99998.000 SAME 99998.000

BUY MAINTAIN BUY 13.60 UP 12.500

BUY MAINTAIN BUY 29.20 UP 27.600