Singapore Banking Monthly - Phillip Securities 2021-10-07: Outlook Still Stable

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

Singapore Banking Monthly - Outlook Still Stable

September interest rates remain flat m-o-m. Bank exposure to China is less than 14% of total loans. We believe customers are primarily SOE and large overseas corporates.
Hong Kong’s domestic loans growth fell 2.68% y-o-y in July.
Malaysia’s domestic loans growth saw its lowest increase of 3.14% y-o-y in July and grew 0.12% m-o-m in July.

Maintain OVERWEIGHT. We prefer DBS (SGX:D05) (ACCUMULATE, Target price: S$32.00) for its leverage to rising interest rates and improvement in economic conditions.

Interest rates were flat in September, with 3M-SIBOR flat at 0.43% m-o-m and 3M-SOR up 2bps to 0.21% m-o-m. 3M-SIBOR is currently 1bps lower than its 2Q21 average of 0.44%. 3M-SOR is 7bps lower than its 2Q21 average of 0.28%.

Hong Kong’s domestic loans growth grew 0.68% y-o-y and fell 2.68% m-o-m in July. It recorded the largest drop m-o-m in July since February 2021. Nonetheless, three government-backed borrowing schemes have been extended by 6 months to further support companies and individuals affected by the COVID-19 pandemic.
They are the SME Financing Guarantee Scheme which will be extended till June 2022, the Preapproved Principal Payment Holiday scheme which will be extended till April 2022, and the Special 100% Loan Guarantee scheme which will be extended till April 2022. The three schemes have granted a total of HK$170bil in loans.
Malaysia’s domestic loans growth saw its lowest increase of 3.14% y-o-y in July and grew 0.12% m-o-m in July. This was mainly due to the wave of COVID-19 cases resulting in further lockdowns which delayed business recovery for the domestic banking sector. A second six-month loan moratorium was also announced in July for all individuals and SME borrowers for which they would only start making full payments in 2022.

Preliminary SDAV for September increased 9% y-o-y to $1,207mil, as Singapore tightened COVID-19 restrictions and community cases continue to rise.
VIX averaged 19.8 in September, up from 17.5 in the previous month as a surge in COVID-19 cases community cases caused it to remain high.
Likewise, the top five equity index futures turnover saw an increase of 3.2% y-o-y in September to 15.5mil contracts mainly supported by higher trading volumes of its FTSE China A50 Index Futures and its MSCI Singapore Index Futures. Notably, Nikkei 225 Index Futures increased 71.6% m-o-m to 1.5mil while FTSE Taiwan Index Futures contracted 5.9% m-o-m to 1.3mil.
Foreign exchange trading on the SGX increased 12% y-o-y to 2mil contracts in August. China’s economic rebound continued to spur strong institutional demand for risk management of the renminbi (RMB). Reflecting this, SGX’s US$/CNH Futures jumped 12% y-o-y to 812,929 contracts. Month-end open interest in this contract, the world’s most widely-traded international RMB futures, increased 30% y-o-y to US$111.2bn.

DBS (SGX:D05) reported that 14.1% of the total loans or S$57bn are in China, while OCBC (SGX:O39) has 10.5% of total loans or S$29bn and UOB (SGX:U11) has 16.1% of total loans or S$48bn in China. This represents less than 14% of all three banks total exposure to China.

We remain positive on banks. Banks traded above 1.4x P/B over the last five years and are currently close to or below our P/B targets. Our price targets are supported by improving ROEs as allowances reverse in FY21e.
- Target price for DBS (SGX:D05): S$32.00.
- Target price for OCBC (SGX:O39): S$14.22.
- Target price for UOB (SGX:U11): S$29.00.
With total allowance coverage being over 30% above the MAS’ regulatory limit, we believe there is further room for GP reversions in 2021. This would boost earnings.
We also believe Singapore banks could pay special dividends when the macroeconomic outlook stabilises. Capital ratios of 14.2–17.5% are higher than the banks’ optimal operating range of 12.5–13.5%. This is supportive of more aggressive capital optimisation. We believe the banks will also look for M&A opportunities with their excess capital.
For sector exposure, prefer DBS. DBS is expected to benefit more from improving market conditions with its wealth-management and investment-banking businesses which could drive earnings in FY21e.

Glenn Thum Phillip Securities Research | https://www.stocksbnb.com/ 2021-10-07

SGX Stock Analyst Report ACCUMULATE MAINTAIN ACCUMULATE 32.000 SAME 32.000

BUY MAINTAIN BUY 14.22 DOWN 14.630

ACCUMULATE MAINTAIN ACCUMULATE 29.000 SAME 29.000