Singapore Banks - UOB Kay Hian 2021-06-04: Silver Lining In Uneven Recovery


Singapore Banks - Silver Lining In Uneven Recovery

  • Singapore banks remained resilient as sectors affected by the COVID-19 pandemic, such as construction, retail trade, transport & storage, accommodation and food & beverage, accounted for a manageable 11% of GDP. The banks also rode on the recovery in Singapore and Greater China, which accounted for 89.1%, 69.6% and 62.8% of total income for DBS, OCBC and UOB in 1Q21.
  • BUY OCBC (Target price: S$15.50), followed by DBS (Target price: S$35.45). Maintain OVERWEIGHT.


Financial services not disrupted by COVID-19 pandemic.

  • The financial services sector (12.9% of GDP) grew 5% in 2020 and 4.7% y-o-y in 1Q21. Sales of investment and bancassurance products were temporarily disrupted as some branches were closed during Singapore’s circuit breaker period (7 Apr 20 to 1 Jun 20), but business gradually normalised thereafter.
  • Growth from the manufacturing sector (19.3% of GDP) was even stronger at 7.3% in 2020 and 10.7% y-o-y in 1Q21. Information & communications and the wholesale trade also grew by a healthy 6.4% and 3.5% y-o-y respectively in 1Q21.

Business as usual in Phase 2 (heightened alert).

  • Operations at bank branches were not affected by the latest tightening of safe-distancing measures in Phase 2 (heightened alert), which runs from 16 May 21 to 13 Jun 21. Customer service activities at bank branches can be conducted with branch staff and customers wearing masks. As such, bank branches are not affected by prohibition of indoor “mask-off” activities.

Relatively lightweight sectors disrupted by COVID-19 pandemic.

  • Sectors affected by the COVID-19 pandemic, such as construction, retail trade, transport & storage (weightage: 50%), accommodation and food & beverage, accounted for 11% of pre- COVID-19 GDP in 2019. The construction, transport & storage and accommodation sectors face a prolonged and harsh winter.
  • Nevertheless, we are hopeful that the retail trade and food & beverage sectors should recover when safe-distancing measures are eased as Singapore steps up testing, contact-tracing and vaccination.

Singapore and Greater China bounced back steadily from lockdown.

  • Singapore GDP grew 1.3% in 1Q21 and MTI maintained its economic growth forecast at 4-6% for 2021. Non-oil domestic exports turned positive in Dec 20 and grew by a healthy 6% y-o-y in Apr 21, driven by electronics (+10.9% y-o-y), petrochemicals (+63.3% y-o-y) and specialised machinery (+54.3% y-o-y).
  • China made great strides in recovering from the COVID-19 pandemic with GDP expanding 18.3% y-o-y in 1Q21. China’s industrial production and retail sales grew 9.8% and 17.7% y-o-y respectively in Apr 21.

Riding on recovery in Singapore and Greater China.

  • In aggregate, Singapore and Greater China accounted for 89.1%, 69.6% and 62.8% of total income for DBS, OCBC and UOB respectively in 1Q21. Singapore and Greater China also accounted for a sizeable 76.7%, 65.5% and 66.6% of total loans. DBS is best positioned to benefit from the rapid recovery from the COVID-19 pandemic in Singapore and China.

DBS least affected by resurgence of COVID-19 infections in emerging Asia.

  • Regional economies afflicted by resurgence of COVID-19 infections accounted for a smaller 7.5%, 24.9% and 29% of total income for DBS (Indonesia and India), OCBC (Malaysia and Indonesia) and UOB (Malaysia, Thailand and Indonesia) in 1Q21. The exposure is also manageable at 8%, 17.4% and 21.6% of total loans.
  • Currently, the COVID-19 situation has improved in Indonesia and India, but has worsened in Malaysia and Thailand.


  • G7 countries and China are experiencing rapid recovery from the COVID-19 pandemic. OECD has raised its projection for global GDP growth by 1.6ppt to 5.8% for 2021 and by 0.7ppt to 4.4% for 2022 due to the rapid rollout of COVID-19 vaccination in many advanced countries and the ramp-up of US stimulus spending. Global GDP would be back to pre-pandemic levels in 2022. President Joe Biden’s US$1.9t American Rescue Plan is estimated to add 1ppt to global GDP growth. The huge stimulus package will have a positive spillover effect for export growth in China.

Inflexion point for monetary policy.

  • Canada and the UK have started to taper quantitative easing. The US Fed has also started to evaluate plans to downsize its bond purchase programme. New Zealand, Norway and South Korea are even more hawkish and are looking to raise interest rates.
  • The Global Financial Crisis was followed by a seven-year period of zero interest rates. We believe the runway for zero interest is much shorter now at just three years. We envisage the US Fed to embark on tapering its bond purchase programme in 2022, paving the way for potential interest rate hikes in 2023.


  • The interest rate cycle is turning. More G7 countries are exiting emergency monetary support put in place during the onset of the COVID-19 pandemic. Given that interest rates in Singapore are highly correlated to the US’, we expect the transition in US monetary policy from accommodative to neutral and subsequently a tightening stance to trigger a re-rating for Singapore banks, pushing valuations toward upcycle levels.


  • Management is upbeat on prospects for future growth in India (Lakshmi Vilas Bank) and China (Shenzhen Rural Commercial Bank and securities JV).
  • DBS (SGX:D05) has upgraded its guidance for loan growth to mid-to-high single-digit for 2021 (2020: +4.2%).
  • Management expects total provisions to be below S$1b in 2021 (2020: S$3.1b).
  • Exposure to loans under moratorium contracted significantly by 70% and dwindled from 4.3% to 1.3% of total loans due to the expiry of the moratorium in 4Q20 (many borrowers did not seek extension).
  • Our target price of S$35.45 is based on 1.56x 2022F P/B, derived from Gordon growth model (ROE: 11.30%, COE: 7.75%, Growth: 1.50%).
  • See DBS Share Price; DBS Target Price; DBS Analyst Reports; DBS Dividend History; DBS Announcements; DBS Latest News.


  • New CEO Helen Wong will focus on capturing flows between ASEAN and Greater China, retail wealth management, sustainable finance and digitalisation.
  • OCBC (SGX:O39) has upgraded its guidance to mid-to-high single-digit loan growth for 2021 (2020: +0.6%).
  • Management expects credit costs to be at the lower end of guidance of 100-130bp over the two-year period (2020: 67bp).
  • Exposure to loans under moratorium dropped by 10.5% from S$5.7b (2.1% of total loans) in Jan 21 to S$5.1b (1.9% of total loans) in Mar 21. 92% of the loans under moratorium are secured by collateral.
  • Our target price of S$15.50 is based on 1.28x 2022F P/B, derived from the Gordon Growth Model (ROE: 9.60%, COE: 7.75%, Growth: 1.00%).
  • See OCBC Share Price; OCBC Target Price; OCBC Analyst Reports; OCBC Dividend History; OCBC Announcements; OCBC Latest News.


  • 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.


  • We maintain our existing forecasts for earnings and dividends.


  • Escalation of geopolitical tension and trade conflict between the US and China.

Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2021-06-04
SGX Stock Analyst Report BUY MAINTAIN BUY 35.450 SAME 35.450