Singapore Banks - Maybank Kim Eng 2021-07-26: Push Release

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

Singapore Banks - Push Release

The US banks are aggressively reversing 2020 provisions as economic growth takes off and COVID-related asset quality fears fail to materialize. Strengthening growth and good progress in vaccinations offer a supportive backdrop for Singapore banks to do the same.
Fresh infections regionally makes timing hard to predict, but just matching the average US pace of write-backs could add 15-18% to 2021E earnings. Improved NIMs, stronger loan growth, rising non-interest income and falling provisions should set the sector for faster earnings momentum in 2Q21.

We prefer OCBC (SGX:O39) and DBS (SGX:D05) for the strongest coupling to these drivers, while also offering the highest probability for earlier provision write-backs.

US banks are reporting strong 2Q21 results. Reserve write-backs have contributed a large share of the beats and on average 40% of provisions taken in 2020 have been released so far, we estimate. Managements claim this is driven by faster than expected US economic recovery and the absence of pandemic-induced asset quality issues. This has positive read-throughs for Singapore banks.
Vaccinations are progressing well with herd immunity on track for 4Q21. GDP is forecasted to expand by 6.8% in 2021E – the highest pace of growth since 2010 driven by strong external demand. Concurrently, new NPL formation as a proportion of loans have fallen by a third in 1Q21 vs 2020, and NPL upgrades have doubled during the same period. This is a conducive environment for provisions write-backs.

Assuming the Singapore banks release 40% of provisions taken in 2020 (to match the US average), we estimate it could add 15-18% to 2021E earnings.
We expect DBS to lead releases (it has already written back S$190m of general provisions in 1Q21) followed by OCBC, given greater exposure to North Asia where recovery is strongly underway.
UOB (SGX:U11) has the largest theoretical potential for releases - its GP + RLAR is 74% of NPLs vs 63% for DBS. Yet, rising COVID cases & fresh lockdowns in ASEAN (22% of loan book) may drive UOB to take a relatively more cautious approach, in our view.

The US banks reported rising opex, particularly employee costs in 1H21. Similar trends are likely for Singapore banks as business activities rise, but borders remain closed creating bottlenecks in labour availability. While we estimate opex to rise 8% y-o-y in 2021E, we think the risks here are on the upside.
Nevertheless, stabilizing NIMs, improved loan growth and higher non-interest income from wealth and loan related fees together with falling provisions should drive earnings momentum higher in 2Q21.
OCBC, UOB is scheduled to release earnings on 4 Aug, and DBS on 5 Aug. Our preferred picks ahead of results are OCBC and DBS for stronger PPOP growth from North Asia together with lower provisions.
Potential increases in dividends, now that the MAS dividend cap has expired, is a further upside risk.

Thilan Wickramasinghe Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2021-07-26

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