OVERSEA-CHINESE BANKING CORP (SGX:O39)
DBS GROUP HOLDINGS LTD (SGX:D05)
DBS OCBC 2Q21 Results Preview - Cyclical Recovery Intact Despite Sequential Moderation
- DBS’ and OCBC’s 1Q21 results were exceptionally strong, inflated by write-backs in general provisions of S$190m and mark-to-market gains from the insurance business respectively. The sequential pullback in 2Q21 was inevitable.
- We forecast DBS and OCBC to achieve net profit of S$1,535m (+23% y-o-y and -24% q-o-q) and S$1,198m (+64% y-o-y and -20% q-o-q) respectively for 2Q21.
- BUY OCBC (Target Price: S$15.52) and DBS (Target Price: S$35.60).
- Maintain sector OVERWEIGHT.
Singapore Banks' 2Q21 earnings release
- OCBC (SGX:O39) and UOB (SGX:U11) are scheduled to release their 2Q21 results on 4 Aug 21 (Wednesday), followed by DBS (SGX:D05) on 5 Aug 21 (Thursday).
DBS: Respectable performance without boost from write-back.
- We forecast DBS to report net profit of S$1,535m for 2Q21F, up 23% y-o-y but down 24% q-o-q.
- The sequential pullback was inevitable as DBS' 1Q21 was exceptionally strong due to solid wealth management fees of S$519m (+29% y-o-y and +50% q-o-q), doubling of net trading income y-o-y and write-back in general provisions of S$190m.
Uptick in loan growth supported by healthy pipeline.
- We expect loans to expand 5.2% y-o-y and 2.0% q-o-q in 2Q21 with broad-based growth from non-trade corporate loans, trade loans and residential mortgages. We expect NIM to remain stable at 1.49%.
Market sentiment softened in 2Q21.
- We expect DBS' total fees & commissions to recover 24% y-o-y but recede 11% q-o-q in 2Q21. Wealth management fees contracted 11% q-o-q as buoyant sentiment driven by stimulus spending in the US in 1Q21 was doused by protracted negotiations in the passage of President Biden’s infrastructure plan.
- We expect contributions from trade-related, transaction services and cards to improve on a y-o-y basis due to low base caused by Circuit Breaker during 7 Apr 21 to 1 Jun 21.
- We expect DBS' net trading income to moderate y-o-y and q-o-q to S$320m in 2Q21.
Asset quality has stabilised.
- NPL formation is benign. DBS has fortified its balance sheet with general provisions reserves increasing 28% y-o-y to S$4.1b in 1Q21, which exceeded MAS' minimum requirement by S$1.0b or 31%. We expect credit costs to moderate to 23bp in 2Q21, compared to 90bp in 2Q20.
OCBC: Normalised contributions from insurance.
- We forecast OCBC to report net profit of S$1,198m for 2Q21, up 64% y-o-y but down 20% q-o-q.
- The sequential pullback was inevitable as OCBC's 1Q21 was exceptionally strong due to solid wealth management fees of S$321m (10% y-o-y and 28% q-o-q), strong net trading income of S$316m (+20% q-o-q), while insurance contributed S$470m (+199% y-o-y and +140% q-o-q) boosted by mark-to-market gains.
Muted loan growth.
- Loan growth is muted at 2% y-o-y and 0.8% q-o-q in 2Q21 due to slowdown in corporate loans and residential mortgages. Management expects loan growth to pick-up in 2H21. We expect OCBC's NIM to be stable at 1.56% with active management on cost of deposits through growth in current and savings accounts.
Phase 2 (Heightened Alert) affected sale of investment and bancassurance products in June.
- We expect OCBC's total fees & commissions to recover 24% y-o-y but recede 7% q-o-q in 2Q21. Wealth management fees contracted 14% q-o-q due to Phase 2 (Heightened Alert), which lasted from 16 May 21 to 13 June 21 and affected the volume of customer interactions. We expect OCBC's other sources of fee income were relatively stable q-o-q.
Contribution from insurance normalised.
- We expect contribution from the insurance business to drop by half on a q-o-q basis to S$220m in 2Q21 due to normalisation without huge mark-to-market gains recorded in 1Q21.
Continued moderation in credit costs.
- We expect asset quality to be stable as repayment trend was healthy. OCBC has set aside management overlay of S$405m, which is above the amount of general provisions required by its macro-economic variable (MEV) model. We expect credit costs of 28bp in 2Q21, a moderation compared to 111bp in 2Q20.
INVESTMENT ACTION
Cyclical recovery powered by COVID-19 vaccination.
- Singapore is expected to achieve the milestone of having 50% of the population fully vaccinated by end-Jul. The government has set a new target whereby 75% of the population will be fully vaccinated by October. Positive implications for the domestic economy include:
- improving business sentiment and confidence,
- easing of safe distancing measures, and
- reducing stress on the corporate sector, thus moderating NPL formation.
- Banks, being cyclical stocks, will benefit from an economic recovery as consumer behaviour and domestic consumption normalises.
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.
Expect easing of restrictions on dividends.
- DBS and OCBC have strong CET-1 CAR of 14.3% and 15.5% respectively in 1Q20, substantially higher than their target range of 12.5-13.5%. Thus, banks are well positioned to fully normalise dividend to their pre-COVID-19 levels when MAS allows them to do so.
- We assume that MAS will lift the cap on dividends from 60% to 80% of 2019 dividend. We expect DBS to pay S$0.25 for 2Q21 and OCBC to pay S$0.212 for 1H21.
- We expect restrictions on dividends to be subsequently eradicated, paving the way for and DBS and OCBC to restore dividend to pre-COVID-19 levels of S$1.32 and S$0.56 respectively for 2022.
Maintain OVERWEIGHT.
- We look forward to the strengthening of the cyclical recovery in 2H21.
ASSUMPTION CHANGES
- We raised our DBS earnings forecast for 2021 by 1.3% due to up-tick in loan growth and lower credit costs.
BUY DBS (Target Price: S$35.60).
Lakshmi Vilas Bank (LVB).
- The integration of DBS Bank India and LVB is proceeding well. Current accounts and savings accounts have grown 14%, leading to a 40bp drop in cost of deposits. Gold loans grew 4%. Management is working on improving the customer journey and strengthening credit appraisal for MSME loans.
- Legacy NPLs were reduced from S$212m to S$186m (down 12%) due to recoveries. Additional specific provisions are covered by general provisions of S$183m taken in 4Q20. Management expects LVB to turn profitable in 12-24 months’ time, with estimated profits of S$20m-30m per year.
- DBS Bank India was recognised as “India's Best International Bank 2021” by Asiamoney.
Shenzhen Rural Commercial Bank (SZRCB).
- DBS will be the single largest shareholder of SZRCB with board representation and a 13% stake, which will be accounted as an associate. The investment of RMB5.3b (S$1.1b) is valued at 2020 P/B of 1.01x.
- SZRCB has consistently generated high ROE of 17.6% during 2015-20. There is a potential upside if SZRCB is listed in the future. There could be opportunities for DBS to increase its stake if SZRCB embarks on equity fund raising to support future growth.
- DBS could provide SZRCB’s corporate customers with access to international trade finance, foreign exchange and capital markets, including equity fund raising through IPOs. DBS could also leverage on SZRCB’s network to deepen its presence in the Greater Bay Area (GBA).
Maintain BUY.
- Our target price of S$35.60 for DBS is based on 1.55x 2022F P/B, derived from the Gordon Growth model (ROE: 11.2%, COE: 7.75%, Growth: 1.5%).
- See
BUY OCBC (Target Price: S$15.52)
New CEO a veteran and heavyweight in banking.
- Ms Helen Wong has taken over as OCBC’s Group CEO with effect from 15 Apr 20. She was Chief Executive of HSBC Greater China from 2015 to 2019, overseeing HSBC’s businesses in Mainland China, Hong Kong, Macau and Taiwan. HSBC’s earnings are derived mainly from Asia, and Greater China is the biggest growth driver.
Four priorities to generate sustainable growth.
- OCBC's new CEO Helen Wong emphasised focus on organic growth from:
- capturing investment and trade flows between ASEAN and Greater China,
- retail wealth management,
- sustainable finance, and
- accelerated growth in digitalisation.
Further reduction of loan relief programmes.
- 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.
Maintain BUY.
- Our target price of S$15.52 for OCBC is based on 1.27x 2022F P/B, derived from the Gordon Growth model (ROE: 9.6%, COE: 7.75%, Growth: 1.0%).
- 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 the easing of safe distancing measures. Recovery in manufacturing and exports.
RISKS
- Escalation of geopolitical tension and trade conflict between the US and China.
Jonathan KOH CFA
UOB Kay Hian Research
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https://research.uobkayhian.com/
2021-07-19
SGX Stock
Analyst Report
15.500
SAME
15.500
35.450
SAME
35.450
