SINGAPORE (March 3): United Overseas Bank has replaced DBS Group as CIMB Research’s top pick among the Singapore banks sector.
This comes after the banks’ 4Q results, which saw high specific provisions for oil & gas on new non-performing loans (NPLs) and write-down of collateral values.
In a sector note on Thursday, CIMB says this has brought the banks’ returns on equity down to 8-9% -- levels not seen since the global financial crisis.
CIMB is keeping its “underweight” rating on the sector.
“While 4Q16 results disappointed at DBS and OCBC, UOB was the relative outperformer on a $311 million general provision writeback, with coverage ratio still highest at 116%,” says CIMB analyst Jessalynn Chen.
In the fourth quarter ended Dec 31, DBS and OCBC saw earnings fall 9% and 18%, respectively, while UOB 4Q earnings slipped 6%. Coverage ratio for DBS and OCBC stood at 97% and 100%, respectively, according to Chen.
(See: DBS posts 9% fall in 4Q earnings to $913 mil on higher allowances)
(See: OCBC reports 18% fall in 4Q earnings to $789 mil)
(See: UOB Group’s 4Q earnings decline 6.2% to $739 mil)
“We are most uncomfortable with DBS’s chunky exposure to highly geared oil & gas names, which could continue to hit its profits through higher provisions should these companies make further impairments or in the worst case, file for liquidation,” says Chen.
“What worries us is management sees weakness in another $1.1 billion of upstream oil & gas loans that have not been taken in as NPLs,” she adds.
CIMB is maintaining its “hold” call on DBS with a target price of $17.66.
On the other hand, Chen says the research house prefers UOB for its “highest provisioning buffer, ability to deploy excess funds into higher yielding assets to provide an added leg up to NIMs (net interest margins), and aggressive cuts in collateral values of vessels of up to 70-90%.”
This leaves UOB with little provisions left to be recognised for the beleaguered oil & gas sector, Chen notes.
At the same time, Chen says that UOB also “continues to see strong fee income growth, especially in credit cards and wealth management.”
CIMB is keeping its “hold” call on UOB with a target price of $20.37.
Meanwhile, OCBC remains CIMB’s “least preferred bank”.
Chen notes that unlike DBS and UOB, OCBC does not have a general provision buffer as its general provisions-to-loans ratio is already at the minimum of 1% required by the Monetary Authority of Singapore (MAS).
Thus, OCBC will be “unable to do a write back in general provisions to buffer the pressure of worsening asset quality on profits,” Chen explains.
“We are also wary of the sharp increase in loans past due but not impaired at OCBC, which could be an indication of further NPLs to come,” Chen adds.
CIMB is keeping its “reduce” call on OCBC with a target price of $8.83.
As at 12.37pm, shares of DBS are trading 12 cents lower at $18.91; shares of UOB are trading 4 cents lower at $21.51; and shares of OCBC are trading 7 cents lower at $9.44.