SINGAPORE (Feb 7): On the face of it, the local banks are a lot more exposed to the economic impact of the novel coronavirus than they were to SARS in 2003. But on closer examination, DBS Group Holdings is more diversified now than in 2003. For instance, DBS Hong Kong contributed 22% to net profit during the nine months to Sept 30, 2019, and Greater China including Hong Kong contributed 26% for the same period. In 2003, Hong Kong contributed 33% to DBS’s net profit. As of Sept 30, 2019, Greater China – Hong Kong, China and Taiwan – accounted for about 30% of total loans of $358.4 billion.
On the other hand, Oversea-Chinese Banking Corp (OCBC) is more exposed to Hong Kong and Greater China now. In 2003, OCBC’s main markets were Singapore, Malaysia and increasingly Indonesia. In 2014, OCBC completed the acquisition of Wing Hang Bank which gave it a larger presence in Greater China. As of Sept 30, 2019, the region accounted for 24% of OCBC’s total loans of $263 billion and 20% of core profit before tax for the nine months to Sept 30, 2019.
For United Overseas Bank (UOB), its Greater China exposure is the smallest of the three at 16.3% of total loans as of Sept 30, 2019. For the nine months to Sept 30, 2019, Greater China contributed 10.5% to PBT of $3.98 billion.
“Economic disruption from the coronavirus outbreak is expected to adversely impact Singapore banks’ operations not just in Greater China, but also Singapore – the tourism sector is one example. We downgrade our ROE expectation to 11.6% (from 12.7%). Our 2020 forecast earnings are also cut by 3% as we assume slower loan expansion and higher provisions,” says Leng Seng Choon, an analyst at RHB Securities in a Feb 5 note. “Disruptions in China brought about by the [coronavirus] are negative for banks with operations there,” he adds.
Although Leng has cut UOB’s rating to “neutral” from “buy”, it remains RHB’s “preferred bank pick”. Leng reckons that UOB’s loan growth this year – which management had guided to be in the mid-single digit during 3QFY2019 results briefing – is likely to be just 2%.
In terms of valuations like P/B, OCBC is the cheapest at 1x book (see chart 1), and DBS the most expensive at 1.28 times (see chart 2). UOB’s P/B is lower than SARS but higher than during the GFC.
In a recent report, Thilan Wikramasinghe, an analyst at Maybank Kim Eng, says in the upcoming banks' results briefings, the outlook articulated by management will be important,"Asset quality should be the key point of focus, given volatility in North Asia and slow domestic growth. Credit charge guidance on the backdrop of the rapidly spreading [novel coronavirus] epidemic and any stress-test outcomes will be of major interest."
The Common Equity Tier 1 (CET1) ratios of the three banks are significantly above local and Basel requirements. Still, investors may want to wait for banks to sink to lower levels before buying. As of Sept 30, 2019, among the three, OCBC has the most excess capital.
“With CET1 level at robust levels, there may be potential for higher dividends. DBS and OCBC have a higher likelihood of this given CET1 levels are well in excess of regulatory requirements,” says Wikramasinghe.
DBS is reporting its FY2019 results on Feb 13, followed by OCBC and UOB, both on Feb 21.
