DBS GROUP HOLDINGS LTD (SGX:D05)
OVERSEA-CHINESE BANKING CORP (SGX:O39)
UNITED OVERSEAS BANK LTD (SGX:U11)
Singapore Banks - Weathering Through The Uncertainties
- SG banks's FY21F net profit is on a trajectory to pre-COVID-19 levels. Tighter movement restrictions are key risks to economy recovery, but only if prolonged, in our view.
- Sequential performance should depend on wealth and treasury income strength. Writebacks of management overlays may stretch out over years.
- DBS and UOB seem willing to reinstate dividend payouts to pre-COVID-19 levels if MAS lifts its dividend cap; OCBC’s stance is less clear.
- Reiterate Overweight. We think SG banks are equipped to ride out pandemic-induced uncertainties. Sector preference is UOB (SGX:U11), then DBS (SGX:D05) and OCBC (SGX:O39).
A temporary blip in Singapore’s economic recovery progress
- Elevated wealth management income, a better showing of trading income driven by strong market sentiment, stable NIMs and vastly lower credit costs exemplified Singapore banks 1Q21 earnings performance.
- Banks’ management teams were unanimously more positive on the economic growth outlook in quarters to come (albeit acknowledging the uneven pace of recovery across the region), raising loan growth forecasts to the mid-to-high single digit range. Meanwhile, rising transaction volumes underscore broad-based fee income improvement.
- The key downside risks to our estimates are extensions of movement restrictions in Singapore which could raise asset quality concerns in the event government moratoriums are introduced, or a subsequent toning-down of the banks’ current positive operating outlook.
- We are cognisant that COVID-19 curbing measures may slow down economic recovery progress, but we think that key revenue drivers of wealth and treasury income, which are partly dependent on financial market performance, and liquidity deployment will still sustain net profit growth back to pre-COVID-19 levels.
Credit costs could rise q-o-q but likely to remain within guidance
- Credit costs were vastly lower in 1Q21 as the height of concerns surrounding loans under moratoriums and borrowers receiving government support have come to pass. For context, loans under moratorium have reduced to ~1-6% of group loans in 1Q21, compared to ~10-15% at its peak in 2Q20. In tandem, impairment provisions totalled ~24-29bp for OCBC and UOB, and just 1bp for DBS in 1Q21 given its model-driven impairment writeback.
- We understand that Singapore banks seek further asset quality stabilisation, particularly for exposures under extended relief, and a more reassuring pace of economic recovery before considering any writebacks of management overlays.
- We believe banks are likely to take on a more conservative stance with slightly higher general provisions q-o-q in 2Q21F given the recent movement restrictions in Singapore. However, we think that full-year impairments will remain within banks’ guidance given the milder extent of movement restrictions and increasing regional COVID-19 vaccination adoption.
Double-digit ROEs still in view; Preference is UOB, then DBS, OCBC
- Financial market volatility, which could affect trading volumes and opportunistic investment gains, and prolonged movement restriction orders are key downside risks to Singapore banks path towards pre-COVID-19 double-digit ROEs (~10-12%), in our view.
- UOB is our top sector pick on the back of a more stable earnings trend coming off record treasury market income across the sector. Trading at 1.0x FY21F P/BV, UOB may close the valuation gap against peers as COVID-19 infections in regional economies start easing, raising the pace of business transactions as the economies reopen.
- See
Andrea CHOONG
CGS-CIMB Research
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LIM Siew Khee
CGS-CIMB Research
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https://www.cgs-cimb.com
2021-05-19
SGX Stock
Analyst Report
32.640
SAME
32.640
13.750
SAME
13.750
28.840
SAME
28.840
