On the back of the 3QFY2020 results released for all three banks, DBS Group Holdings, UOB, and Oversea-Chinese Banking Corporation (OCBC) on Nov 4 and 5, analysts from CGS-CIMB, PhillipCapital and UOB Kay Hian are mixed on the banks’ prospects.
See: DBS 3Q20 net profit inches up 4% q-o-q to $1.30 bil, fee income rebounds, UOB reports 40% lower 3Q net earnings of $668 mil, shores up $339 mil of credit allowance for the quarter and OCBC posts 12% drop in 3Q earnings to $1.03 bil on larger allowances, higher than consensus' estimates
CGS-CIMB analysts Andrea Choong and Lim Siew Khee have upgraded their recommendations on both DBS Group Holdings and Oversea-Chinese Banking Corporation (OCBC) in a Nov 7 report to “add” from “hold” previously.
The analysts issued a previous report dated Nov 5, maintaining their “neutral” call on the Singapore banking sector. They have also kept their “hold” calls for both DBS and OCBC in the same report.
See also: Singapore banks' 3Q earnings beat expectations due to treasury income, says CGS-CIMB
For DBS, the upgrade comes as the analysts lower their FY2021F credit cost estimate to 28 basis points (bp) compared to the 79 bp in FY2020F.
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The tapered estimates are due to the “well-secured exposures” in 3QFY2020 with minimal specific provisions required. The bank has also aggressively provisioned about 50-83% of impairment guidance) in 9MFY2020.
In 3QFY2020, the bank’s corporate stress was spread across a handful of exposures – namely a consumer goods exposure in China, a state-owned-enterprise (SOE) in Indonesia and an oil-related exposure in Hong Kong.
Choong and Lim also expect stabilising net interest margins (NIMs) from 4QFY2020F onwards as base rates bottom.
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“Apart from continued downwards pressure on base rates, flush liquidity and DBS’s strategy to plough its excess funding into lower-risk placements with Monetary Authority of Singapore (MAS) had contributed to the sequential NIM decline in 3QFY2020. Apart from these, credit spreads held up. DBS’s current account and savings account (CASA) base expanded $70 billion in 9MFY2020, comprising mainly S$ and US$,” they note.
“Although risk-adjusted returns of these placements with MAS are attractive given the zero risk-weights, they will remain a drag on NIM due to the lower absolute returns. Assuming a base case of benchmark rates having bottomed out, DBS expects NIM to stabilise at c.1.45-1.5% in FY2021F; we expect 1.62% in FY2020F,” they add.
On that, the analysts project fee income to be a key revenue driver in FY2021F given the impending impact of lower NIM.
“In particular, we expect wealth management income to sustain, driven by expansion into the mass market and heightened interest from the western hemisphere. Tapering impairments should provide some room to manoeuvre revenue gaps,” they say.
Choong and Lim, have thus, upped their target price on DBS to $25.51 from $20.46 previously, and forecast distribution per share (DPS) of $1.08 for FY2021F. They have also raised their earnings per share (EPS) estimates for FY2020-2022F by 10-16% as they cut credit costs and adjust net interest margins (NIMs).
The pair are also positive on OCBC on the bank’s capital build-up, as well as clearer navigation of asset quality indicators.
“Our Gordon Growth Model (GGM)-based target price rises to $10.13 [from $9.38 previously] as we cut FY2021F credit costs, adjust NIMs and roll-forward to FY21F. Resumption of dividends to levels prior to Monetary Authority of Singapore's (MAS) dividend cap is a key re-rating catalyst; we expect 53 cents DPS for FY2021F,” they write.
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For OCBC, Choong and Lim also see “encouraging” repayment trends as loan moratoriums expire in Malaysia with “over 90% of these loans resuming timely and full repayments”.
“Risks of non-payment are present given the limited track record so far, but early engagement with customers will provide it warning signs. OCBC projects the exit of its loans under moratorium in Singapore ($8.8 billion) and HK ($1.5 billion) to be relatively smooth given active government support (grants, jobs support scheme), but it would keep watch on those in Indonesia ($1.6 billion); around 93% of this portfolio is secured, mostly by real estate,” they note.
The way the analysts see it, the repayment trends will “like result in” the lower end of the 100-130 bp OCBC guided in credit costs.
“Assuming no write-offs, NPL ratio could rise towards 2.5-3.5% (1.6% currently). Flows into this ratio will likely stem from the exit of the various relief programmes vs. new cases of business failure. However, current repayment trajectory and write-offs should keep this ratio at the lower end of the range,” they say.
NIMs for OCBC should stabilise going into FY2021F, as more loan repricing filters through, say the analysts.
“OCBC’s strategy is to build on longer-tenured assets and shore up its CASA base to stem further compression; we expect c.1.47% in FY21F (FY20F: 1.6%),” they say.
“OCBC expects low-to-mid single-digit loan growth in FY2021F as key markets continue to be affected by closed borders. Modest growth and contained credit migration (via NPL formation trajectory) should see risk-weighted assets (RWA) growing c.5% in FY2021F, keeping CET1 ratio over c.14%. RWA savings of c.$7 billion from OCBC Wing Hang’s adoption of the international ratings-based (IRB) approach (likely 1H2021F) could push this closer to c.15%, above the group’s efficient range of 12.5-13.5%,” they add.
Like DBS, Choong and Lim have raised their EPS estimates for OCBC by 1-9% as they “cut credit costs and adjust NIMs”.
Similarly, UOB Kay Hian analyst Jonathan Koh has rated DBS at “buy” on peaked credit costs and stabilising NIMs.
He has also upped his target price for DBS to $26.75 from $23.50 previously.
DBS’s 3QFY2020 net profit of $1.30 billion came in above the brokerage’s expectations of $1.11 billion.
In his outlook for 2021, Koh expects DBS’s NIM to further moderate to 1.45-1.50%.
“Management expects operating expenses to hold flat at 2019 level with cost/income ratio at 43% during 2021,” he says.
He also anticipates lower credit costs in 2021 on an upward trend in NPL formation as government relief programmes end next year.
“DBS sees episodic corporate NPL formation but consumer delinquencies are expected to decline with improved collection. Management has maintained guidance for total provisions at $3 billion to $5 billion cumulatively for two years in 2020 and 2021. Given that DBS has fortified its balance sheet by recognising more provisions upfront in 2020 ($2.5 billion taken in 9MFY2020), provisions are expected to be lower in 2021,” he says.
“We raised our net profit forecast for 2021 by 10% due to lower credit costs of 42.6bp (from 55.9bp previously). We expect dividend yield to improve from 4.8% in 2021 to 5.9% in 2022,” he adds.
In an unrated report on United Overseas Bank Limited (UOB), Koh notes that the bank’s exposure to moratorium loans has reduced from 16% to 10% of total loans on a group-wide basis as the automatic loan moratorium has expired in Malaysia and Thailand.
“NPL ratio is expected to peak at slightly above 2% (previous: doubling to 3%). Management has reaffirmed guidance for credit cost at 60bp for 2020. However, this was revised downwards from 60bp to 30-40bp for 2021. Management expects UOB to benefit from lower credit costs in 2021,” he says.
PhillipCapital analyst Tay Wee Kuang has maintained his “neutral”, “accumulate” and “accumulate” ratings on DBS, OCBC and UOB respectively.
Tay has also upped the target prices of all three banks to $22.60, $9.68 and $21.10 from $21, $8.92 and $20.40 previously.
In a Nov 9 report, Tay sees weakness for DBS could sustain into the 4QFY2020 as net interest income (NII) fell 12% y-o-y while NIM was down 37 bp to 1.53%. This is despite the bank registering a recovery in non-interest income in the 3QFY2020 and tapering allowances made during the quarter.
“The bank expects a strong economic rebound in Asia in 2021 to support mid-single-digit loan growth in FY21. However, as Singapore loan growth remains tepid, we are hesitant to revise our loan-growth assumptions of 2-3%. A strong fee-income recovery to pre-Covid level is expected to support its income recovery in 2021,” he notes.
“No change to earnings estimates but we peg our valuation at a higher 1.26x FY21e P/BV on lower allowances from a better credit outlook. For sector exposure, prefer UOB,” he says.
For OCBC, Tay says he “hold our estimates for FY20e/FY21e and peg our valuation at 0.92x FY21e P/BV and an 8.6% ROE as allowances start to taper off” on a predicted slow recovery for the bank.
“[The bank] expects NPL ratio to come in at the lower end of the 2.5-3.5% range it guided previously. The bank’s heavy provisioning in the first three quarters is likely sufficient to see it through FY2021,” he adds.
On the other hand, Tay has raised his FY2021e forecast on UOB to “reflect lower credit costs of 30-40 bp” as he holds his FY2020e earnings estimates.
This comes as UOB’s 3QFY2020 earnings of $668 million came in line with the brokerage’s and consensus’ estimates.
In his outlook statement, Tay says loans under moratorium fell from 16% to 10% in 3QFY2020, mainly due to the expiring loan moratoriums in Malaysia, which ended in end September.
“The remaining loans under moratorium were mostly from Singapore and Thailand. The bank is confident it can manage asset quality, given that around 90% of them are secured. It has lowered credit-cost guidance from 50-60bps for this year to 30-40bps for FY2021,” he says.
Shares in DBS, OCBC and UOB closed $24.40, $9.43 and $21.26 respectively on Nov 10.
See also: Banks' 3Q20 results to be 'lukewarm', with slight recovery from 2Q20: PhillipCapital
