SINGAPORE (May 11): Mainly because of higher provisions, the three Singapore banks have posted double-digit y-o-y lower earnings growth for 1Q2020 ended March. However, they have kept costs under control and eke out higher non-interest income amid uncertain market conditions, says DBS analyst Lim Rui Wen.
As such, DBS Group Research remains “neutral” on the banking sector on expected higher credit costs for FY21F, and declining net interest income (NII) on a lower net interest margin (NIM).
“We remain neutral on the sector as we see limited upside ahead, given the lower-for-longer interest rate environment and near-term recessionary outlook,” says Lim.
Over the last two weeks, all three banks have announced their closely-watched 1QFY2020 earnings. DBS Group Holdings (DBS) reported earnings of $1.17 billion, down 29% y-o-y; Oversea-Chinese Banking Corporation (OCBC) announced earnings of $698 million, down 43% y-o-y; and United Overseas Bank (UOB) posted 19% y-o-y fall in earnings to $855 million.
DBS, which has a quarterly dividend policy, is keeping its 1Q payout at 33 cents per share.
OCBC and UOB, on the other hand, pays every half a year. While Lim expects them to maintain their 1HFY2020 dividend payout to be the same as 1HFY19, she is not so sure for 2HFY2020. Lim expects OCBC and UOB to cut their full year payout by 13% and 15% respectively.
Meanwhile, Maybank Kim Eng analyst Thilan Wickramasinghe has maintained a “buy” on both DBS and UOB with a higher target price of $22.10, previously $21.99, and a lower target price of $22.42 previously $22.55, respectively.
While both banks have performed in line with street expectations, Wickramasinghe was expecting better.
He remains positive on DBS for its ability to generate across all-round growth, albeit at a slower pace in this Covid-19-induced recession.
Wickramasinghe expects DBS to put up with higher credit costs and has lowered his earnings estimate for the bank for FY2020 to FY2023 at between 3 to 5%.
Even so, he expects DBS, backed by its strong capital buffers, to maintain its dividend payout at a 7% yield level.
“The upside to capital preservation from cancelling dividend at this stage is limited, in our view. Management claims they are comfortable with raising payout to 70-80% (from 49% in 2019) to maintain dividends. Even at this level of payouts, plus higher credit charges and rising RWA from weaker asset quality, CET1 (13.9% 1Q20) should still be above the management comfort levels of 12.5% in the medium term, we estimate,” he adds.
For UOB, Wickramasinghe likes this bank for its diversified geographical presence, regional integration, and strong liquidity on the US dollar.
He estimates a 5% lower profit after tax (PAT) for 2020-2021E after estimated elevated credit charge levels, asset quality and lower operating expenses (opex) on government support schemes, lower bonuses, as well as cuts to marketing, travel, and tech projects.
He also estimates the bank’s overall Common Equity Tier 1 (CET1) levels to remain above minimum management comfort levels to preserve its 50% dividend payout.
CGS-CIMB on the other hand, has maintained UOB’s “hold” with an unchanged target price of $19.04 on “flattish” 1Q2020 revenue trends.
Analysts Andrea Choong and Lim Siew Khee expect a q-o-q rise when UOB’s management guide for 50-60 basis points in FY20 credit costs comes through in 2HFY20, and 1HFY21 on business losses from the Covid-19 pandemic, and as moratoriums and relief measures wear off.
“We raise FY21F impairments to reflect this and expect 58/50bp credit costs in FY20/21F,” estimate Choong and Lim, on pressure on asset quality on UOB’s portfolio of 15% of loans on small medium enterprises (SMEs).
Analysts are more reserved on OCBC. DBS’ Lim is keeping the “hold” call with an unchanged target price of $7.90, while RHB’s Leng Seng Choon has slightly lowered his target price on OCBC to $8.70 from $9.
DBS’s Lim has cut OCBC’s FY20-21F earnings by a further 8-9% on higher credit costs, and projects 115 basis points of credit costs for the bank for the next two years.
She believes that OCBC’s absolute dividend per share (DPS) could be cut to 46 cents in FY20F from FY19’s 53 cents, on the back of the expected decline in corresponding earnings.
RHB’s Leng “prefers” OCBC over its peers on its higher CET1 CAR even though OCBC’s 1Q20 net profit of $698 million was slightly below forecast. He has also cut OCBC’s return on equity (ROE) assumption to 8.3% from 9.5%, vs 1Q20’s 6% on the back of raised provisions, and forecasts a dividend yield of 36 cents per share.
Conversely, CGS-CIMB and Maybank Kim Eng have downgraded their “buy” calls for OCBC. The former has a lowered target price of $8.37 from $9.04, while MBKE’s new target price is$9.46, down from $10.32.
Maybank’s Wickramasinghe has lowered his earnings estimate for OCBC for FY2020-2022 by 3-11%, on a potential negative impact on its insurance business, trading and higher credit charges. This is despite its strong 14.3% CET1, which is likely to remain “above management’s comfort level of 13.5% in 2020E”, he says.
CGS-CIMB’s Choong and Lim expects OCBC to suffer from weaker revenue despite its relatively “resilient” NIM at 1.76%, and slightly stronger than expected fee income of a 10% y-o-y growth, despite the poor showing by its separately-listed insurance subsidiary Great Eastern Holdings.
They also believe that OCBC’s “progressive dividend policy”, with an estimate of DPS 53 cents is achievable, given the given the eventual close to $7.5 billion in risk-weighted assets (RWA) savings from OCBC Wing Hang Bank’s (WHB) adoption of the internal ratings based approach towards end-FY20F.
Shares in DBS closed 30 cents higher, or 1.5% up, at $20.
Shares in OCBC closed 6 cents higher, or 0.7% up, at $8.94.
Shares in UOB closed 19 cents higher, or 1.0% up, at $20.07.
