SINGAPORE (Dec 14): UOB Kay Hian says Oversea-Chinese Banking Corporation (OCBC) leads local banks in cost efficiency with the lowest staff cost per employee at $83,333 and lean other non-wage expenses.
OCBC has also grown income per employee and pre-provision operating profit (PPoP) per employee at a faster pace ith CAGR at 4.7% and 4.4% for 2013 and 2017 respectively.
UOB has a "buy" on OCBC with a target price of $13.56 based on 1.44 times 2018 book.
In a Thursday report, analyst Jonathan Koh assesses the productivity and cost efficiencies of Singapore’s three main banks to identify key drivers of growth after Investments in fintech have accelerated on a global basis since 2014.
Despite cost-income-ratio (CIR) having deteriorated in 2016 for OCBC, Koh notes a vast improvement in 9M17 with significant recovery from wealth management and life insurance such that the bank had the lowest CIR of 42.3% by end Sept.
Koh likes DBS Group Holdings next, rating it a “buy” at a target price of $26.10 based on 1.38 times 2018 book.
The bank leads in terms of productivity, says Koh, with the highest average income per employee at $538,805 and PPoP per employee at $313,701 due to its focus on developed markets in Singapore & Hong Kong, as well as its strength in corporate banking.
This has contributed to faster total income growth of 6.4% y-o-y in 2016 and 1.8% y-o-y in 9M17, including the gains of the bank’s divestment of PwC Building, compared with 1.5% and 0.6% for expenses respectively.
“DBS benefits from economies of scale due to its established presence in Singapore and Hong Kong with market shares, which are major financial centres, estimated at 20.6% and 4.2% respectively,” elaborates the analyst.
Given that the bank also owns and runs its own technology infrastructure for greater control and flexibility, Koh also highlights how IT expenses have dropped y-o-y for DBS over 2016 and 9M17 by 0.7% and 8.9%, respectively, after completing its digital transformation and launching DigiBank in India in April 2016.
As for United Overseas Bank (UOB), Koh observes that its expenses exceeded income over 2015 and 2016 to result in deteriorating CIR, with expense growth of 6.7% still faster than DBS and OCBC’s respective 0.6% and 5.7% growth.
The stock, which is unrated, also saw its IT expenses grow at a three-year CAGR of 21.4% in 2014-2016, with IT expenses accounting for 9% of operating expenses in 9M17 versus 17% for DBS.
Sector-wise, UOB Kay Hian is remaining “overweight” on Singapore banks on normalisation of central banks’ balance sheets and resilient global growth.
Deregulation for banks and efforts towards reducing corporate tax rates in the US could also add to positive sentiments on the sector, adds UOB.
This should energise banking stocks and lift their mid-cycle valuations above norms.
As at 11.52am, shares in OCBC, DBS and UOB are trading at $12.36, $24.93 and $26.52 respectively.
