And why did we upgrade DBS?
As competition increase, we expect NII to be led by loans volume growth. DBS has the highest Singapore CASA ratio of 91% and the largest overall deposit base of S$342.9bn. This will mean UOB and OCBC will not be able to lend more competitively than DBS. We believe this is the advantage DBS enjoys over its peers, especially against foreign banks like HSBC and BOC as they begin to compete for loans in Singapore.
Loans Growth will be the driver for better NII.
Singapore banks’ NII performed better because of stronger loans growth. The actual loans growth rate in 1H17 had exceeded bank managements’ guidance of mid-single digit loans growth. The recent improvements to economic outlook across Singapore banks’ key markets including Malaysia and Hong Kong will continue to support loans growth and positive loans volume and rate dynamics. However, we expect the pass through of higher interest rates to be crimped by competition especially in the property sector therefore NIMs expansion may be more subdued.
We expect excess capital to be returned to shareholders in the form of higher dividends.
We think that the build-up of excess CET 1 above the regulatory hurdle of 6.5% and the threat of negative economic value as WACC exceeds ROIC may spur the Singapore banks to return some excess capital to shareholders. We opine that the banks may experience lower ROIC because of our view of a more subdued NIMs. Therefore capital that cannot be deployed to improve ROIC above WACC may instead be returned to shareholders.
INVESTMENT ACTIONS
Upgrade to NEUTRAL Singapore Banking Sector – We upgrade the Singapore Banking Sector to Neutral weight from Underweight. Macro conditions have been more positive than we expected. We expect higher interest rates and loan volume to help drive NII higher.
We maintain our Reduce rating on UOB and Neutral rating on OCBC. And we upgrade our rating on DBS from Neutral to Accumulate.
Loans growth is better than consensus but NIM and allowances are generally in line.
Source: Bloomberg, PSR estimates
How did Singapore banks’ share price move in comparison with interest rates?
Contrary to market expectations that a rising SIBOR is always beneficial for Singapore banks, we have seen increasing SIBOR result in a steep fall in share prices. Therefore we highlight that the conditions in which SIBOR moves are more important than the direction of movement.
Source: Bloomberg, PSR estimates
How was the progress for the Singapore banks so far?
a) Strong growth in DBS and OCBC WM; UOB is lagging behind.
OCBC’s stronger WM contributions came from the completion of Barclays WM business acquisition in 4Q16 and the broader mix of WM products and services from its bancassurance arm and the Lion Global franchise. Owing to improving investor sentiments or risk appetite from the start of 2017, expect OCBC WM to continue performing well on the back of growing AUM and product synergies (See Fig. 2). OCBC has announced the acquisition of NAB’s private wealth business in Singapore and Hong Kong which is expected to be completed at the end of 2017 subject to regulatory approval.
DBS’ WM growth came from the upper affluent clientele through the Treasures, Treasure Private Client and Private Bank platforms (See Fig. 3). We believe that DBS’ niche in the upper affluent market segment provides it with long term consistent growth.
UOB is lagging behind in WM compared to peers. UOB AUM from Privilege Banking, Privilege Reserve and Private Bank is only S$99bn. This is significantly lower than DBS AUM from Treasures, Treasures Private Client and Private Bank is S$175bn.
Figure 1: DBS’ and OCBC’s WM income share of total income has been increasing in the past quarters*
Source: Company, PSR estimates
*UOB does not separately disclose their WM income in full detail
Figure 2: OCBC’s AUM growth and broad WM product mix has driven quarterly WM income higher.
Source: Company, PSR estimates
Figure 3: DBS’ WM income supported by strong AUM growth in its Treasures, Treasures Private Client and Private Banking platforms and improving yields on these AUM.
Source: Company, PSR estimates
b) Quarterly provision expense may become more volatile as coverage ratios remain at historically low levels.
Offshore oil and gas vessel owners have been grappling with weak cash flow for about 2 years. Charter rates and charter tenures remain low. Therefore there are risks of elevated net NPL* from the sector. Write offs could become lumpier too as the prospects for recovery remains poor. Given the low coverage ratios, Singapore banks have less buffer to smoothen out the provision expense but will have to respond with the appropriate amount of provisioning expense in any given quarter if NPL formation becomes elevated.
* Net NPL formation is New NPL less upgrades, recoveries and translations.
Figure 4: The Singapore Banks’ NPL ratio appears to have stabilized since 4Q16 as risks of lumpy NPL formation is behind us. But NPLs can remain elevated as the offshore Oil and Gas sector is not seeing a recovery soon.
Source: Company, PSR estimates
Figure 5: DBS’ coverage ratio holds steady at 100% as the profits from the sale of PwC building was used to pad up general provisions in 1Q17.
Source: Company, PSR estimates
Figure 6: DBS’s recent quarterly PPOP growth rates have been insufficient to offset the elevated net NPL plus write offs. But we expect better performance in 2H17 for DBS.
Source: Company, PSR estimates
Jeremy covers primarily the Banking and Finance sector. He has 6 years’ experience in equities related dealing and research roles.
He graduated with Bachelors of Mechanical Engineering from Nanyang Technological University.
