SINGAPORE (June 8): UOB Kay Hian is remaining “overweight” on Singapore’s banking sector after reviewing the city state’s three banks based on asset quality as well as ability to generate pre-provision operating profit (PPoP).
In a Thursday report, analyst Jonathan Koh names DBS and Oversea-Chinese Banking Corporation (OCBC) as his top two “buy” picks with target prices of $23.30 and $11.70 respectively.
“We use PPoP/gross loans as an indicator of resiliency to withstand shocks from deterioration in asset quality,” explains Koh.
“From a fundamentals perspective, banks will benefit from rising interest rates. DBS and OCBC trade at 2017F P/B of 1.10x and 1.18x, which are 18% and 29% respectively below their long-term mean of 1.34x and 1.66x. They also provide decent dividend yields of 2.9% and 3.4% respectively."
In particular, he notes that DBS generated the highest PPoP growth over 2014 to 1Q17, with a three-year compound annual growth rate (CAGR) of 8% as compared to OCBC and UOB’s respective three-year CAGR of 6.8% and 4.5%.
Aside from having achieved the highest PPoP/gross loans of 220bp in 2016, the bank’s overall PPoP/gross loans appears to be on an uptrend as well, he adds, compared to a downtrend for both OCBC and UOB.
“While OCBC is more conservative to recognise more non-performing loans (NPLs), DBS is more proactive to write off and clean up NPLs,” observes Koh, who notes that NPL formation has proven higher at OCBC after recognising NPLs from the oil and gas (O&G) sector early since 3Q15.
“DBS’s NPL formation is lower at 85bp compared to OCBC’s 99bp if we compare the average NPL formation for 2015 and 2016… OCBC achieved a high average recoveries and upgrades of 47bp during 2014-16. Conversely, DBS’s was lower at 21bp, but its write-offs were heavier at 30bp,” he explains.
As at 11.32am, shares of DBS and OCBC are trading 5 cents and 2 cents higher at $20.48 and $10.60 respectively.
