On Jan 27, Fitch Ratings had a sombre message for investors of banks. Its newly-updated interactive country-by-country map of bank rating trends shows that nearly 60% of bank ratings were still on Negative Outlook at end-2020, with just a marginal decrease from end-1H2020. “There were virtually no ratings on Positive Outlook or Rating Watch Positive,” the ratings agency says.
While immediate risks to banks have been largely avoided during the pandemic, medium-term risks remain from the gradual withdrawal of government support for the economy and for borrowers, Fitch Ratings indicates; and a high proportion of Negative Outlooks may persist well into 2021.
Among the regions, Negative Outlooks/ Watches are least widespread in Asia Pacific. “Stable Outlooks were more common in these markets, mostly due to the prevalence of ratings driven by our belief that banks would receive support, if needed, from a sovereign or parent institution that itself was on Stable Outlook. In addition, many banks had headroom in their Viability Ratings,” Fitch says.
Where do Singapore banks stand?
CGS-CIMB Research, cites four factors around the local banks to make a compelling case for investors to stay invested. First, clarity on the cap on dividends of 60% of FY2019’s dividends by the Monetary Authority of Singapore is likely this year. Lifting the cap would trigger a re-rating. “We think there is enough reason not to extend the cap given improving economic activity levels, large impairment buffers built up in FY2020, strong capital ratios (CET-1 at 14%), and targeted government aid beyond the expiry of loan moratoriums across the region,” CGS-CIMB states in a report dated Jan 27.
Second, provisioning levels were hefty in 2020, and these have lowered net profit levels at the local banks. If they recede, profitability would improve. “While hefty front-loading of impairments in FY2020 will most likely see y-o-y credit costs improve, we think a sustained decline in group loans under moratorium concurrent with consistent improvements in business transaction volumes and contained non-performing loan (NPL) accretion could signal further cuts in impairment expenses,” CGS-CIMB says. Singapore banks are unlikely to write-back excess provisioning this year, but anticipation of write-backs in, say, 2022, could provide further price support.
Third, with benchmark interest rates at historic lows, net interest margins (NIM) may remain under pressure, and this factor may remain a negative for banks at least in 1H2021. “Given no change to Fed rates, our base case factors in a 5–15 basis points of NIM compression across banks in FY2021,” CGS-CIMB says. Interestingly, the yields of 10-year treasuries and 10-year Singapore government securities have risen above 1% in January this year. While these are still very low historically (see Chart 1), yields have more than doubled since August 2020. Firmer yields could be good for banks net interest income.
Finally, what about M&As? On Jan 18, UOB Asset Management (UOBAM) announced the acquisition of VAM Vietnam Fund Management Joint Stock Company, which will be renamed UOB Asset Management (Vietnam) Fund Management Joint Stock Co, subject to regulatory approval. The acquisition sounds modest but it allows parent United Overseas Bank to cast a wider net. UOB has a foreign-owned subsidiary bank license in Vietnam which allows it to open branches and serve consumers and businesses across Vietnam.
Elsewhere, DBS Group Holdings is acquiring Lakshmi Vilas Bank, as instructed by the Reserve Bank of India. It has injected $463 million into the Indian bank.
More interesting, suggests CGS-CIMB, is the new group CEO of Oversea-Chinese Banking Corp. OCBC has the highest common equity tier -1 (CET1) ratio among the local banks, which could expand further. For one, its scrip dividend is the most generous and has a take-up rate of around 75% to 80%, which accretes capital. CGS-CIMB says OCBC Wing Hang’s adoption of internal ratings based (IRB) approach is likely to raise CET1 to 15%. “We think there is scope to reconsider deploying these funds,” CGS-CIMB says.
Based on these four factors, CGS-CIMB reiterates an overweight on all three banks. The preference is for UOB, OCBC and DBS in that order. Although, in terms of valuation, UOB has rebounded from a 10-year low, its P/B ratio is still trading below its mean of 1.3 times (see Chart 2: UOB). DBS has already reverted to its two standard deviations above its mean (see Chart 2: DBS). OCBC is somewhere midway between DBS and UOB (Chart 2: OCBC).
