DBS GROUP HOLDINGS LTD (SGX:D05)
OVERSEA-CHINESE BANKING CORP (SGX:O39)
UNITED OVERSEAS BANK LTD (SGX:U11)
Singapore Banks 1Q21 Roundup - Outlook Brightens Despite Uneven Recovery
- Singapore banks posted record earnings with stabilisation in NIM, growth in wealth management, strong net trading income and moderation in credit costs.
- DBS, OCBC and UOB’s CET-1 CAR of 14.3%, 15.5% and 14.3% respectively are much higher than the targets of 12.5-13.5%.
- Singapore banks are well positioned to normalise dividend to pre-COVID-19 levels. DBS and OCBC provide 2022F dividend yield of 4.4% and 4.5% respectively. Maintain OVERWEIGHT.
- BUY OCBC (Target Price: S$15.50) and DBS (Target: S$35.45).
All 3 Singapore banks beat expectations.
- DBS (SGX:D05), OCBC (SGX:O39) and UOB (SGX:U11) reported net profit of S$2,009m (+72% y-o-y), S$1,501m (+115% y-o-y) and S$1,008m (+18% y-o-y) respectively. DBS and OCBC achieved record earnings. See:
- DBS, OCBC and UOB benefitted from the following trends:
- NIM has stabilised and was flat q-o-q at 1.49% for DBS, 1.56% for OCBC and 1.57% for UOB in 1Q21. The low interest rates environment is already fully reflected in the current NIM. DBS and UOB registered pick-up in loan growth of 4.1% and 4.2% q-o-q respectively.
- Surge in wealth management fees. DBS, OCBC and UOB’s wealth management fees grew 15%, 10% and 19% y-o-y in 1Q21 despite a high base in 1Q20. Buoyant sentiment drove recovery in customer activities to invest in the re-opening and recovery themes. AUM grew 18% y-o-y at OCBC and 10% y-o-y at UOB.
- Strong net trading income. OCBC registered strong net trading income of S$316m, representing an increase of 20% q-o-q. DBS and UOB’s other non-interest income grew 101% and 49% q-o-q respectively due to increased customer flows.
- Provisions continued to moderate as asset quality stabilised. DBS and UOB’s NPL ratio improved by 0.1ppt q-o-q to 1.5%. NPL formation has dropped 51% for DBS and 59% for UOB compared with the quarterly average in 2020.
- Singapore banks took pre-emptive provisions upfront in 1H20 and provisions have eased since 2H20. DBS wrote-back general provisions of S$190m. Total provisions dropped by a hefty 75% y-o-y for OCBC and 30% y-o-y for UOB.
- OCBC benefitted from mark-to-market gains from insurance businesses. OCBC’s insurance businesses contributed earnings of S$470m in 1Q21, an expansion of 140% q-o-q, due to mark-to-market gains from favourable market conditions.
ACTION
- Stronger recovery from developed countries. Advanced economies are recovering from the COVID-19 pandemic with re-opening of their economies and successful rollout of CIOVID-19 vaccinations. The US economy registered strong growth of 6.4% in 1Q21, driven by re-opening and fiscal stimulus. The Chinese economy also grew 18.3% y-o-y in 1Q21, although growth is estimated to be slower at 5.4% y-o-y if adjusted for the low base.
- Transition in monetary policy from easing to neutral stance. The rise in government bond yields is temporarily halted by the resurgence of COVID-19 in several developing economies. The 10Y Singapore government bond yield currently hovers at about 1.6%. We observed that some central banks in OECD countries have started to slow the pace of quantitative easing. For instance, Bank of England expects the British economy to be back at pre-COVID-19 size by 4Q21 and will reduce bond purchases from £4.4b to £3.4b per week.
- Recovery in place although uneven. DBS and OCBC have upgraded their guidance on loan growth to mid to high single-digit, reflecting their more optimistic outlook.
- Willing and able to pay more dividends. DBS, OCBC and UOB have strong CET-1 CAR of 14.3%, 15.5% and 14.3% respectively in 1Q21, substantially higher than their target range of 12.5-13.5%. Banks are well positioned to fully normalise dividend to their pre-COVID-19 levels. We envisage a 2-step process in normalisation of dividends. We expect DBS to pay S$0.30 per quarter in 2021 and S$0.33 per quarter in 2022. We expect OCBC to pay S$0.25 per half year in 2021 and S$0.28 per half year in 2022. MAS is expected to announce its guidance on dividend for Singapore banks in May-Jun 21.
- Maintain OVERWEIGHT. Our top pick for Singapore Banks is OCBC (BUY, Target Price: S$15.50), followed by DBS (BUY, Target Price: S$35.45).
- See:
SECTOR CATALYSTS
- Gradual recovery in banks’ earnings and DPS due to decline in credit costs in 2021 and 2022.
- Continued recovery of the Singapore domestic economy accompanied by easing of safe distancing measures. Recovery in manufacturing and exports.
RISKS
- Escalation of geopolitical tension and trade conflict between the US and China.
REPORTS ON DBS, OCBC & UOB
Jonathan KOH CFA
UOB Kay Hian Research
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https://research.uobkayhian.com/
2021-05-10
SGX Stock
Analyst Report
35.450
SAME
35.450
15.500
SAME
15.500
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SAME
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