Singapore banks can expect lower net interest margins (NIMs) ahead though credit costs could ease in 2H2020. The reports come after the three local banks posted broad-based net profit declines for 1H20 last week.
DBS Group Research analyst Lim Rui Wen is maintaining “hold” on OCBC bank with a target price of $9.30 while upgrading UOB to “buy” with a target price of $22.20.
“Singapore banks saw broad-based net profit declines y-o-y, weighed down by lower net interest income, lower fee income (likely trough for the year as 2Q2020 coincides with movement restrictions), and higher provisions, but buffered by stronger non-fee income on favourable market conditions and lower costs,” writes Lim in an August 11 report.
Lim notes that credit cost guidance was largely maintained with DBS at 80 to 130 basis points (bps), OCBC at 100 to 130 bps, and UOB at 120 to 130 bps of credit costs cumulatively over the next two years.
The banks are also shoring up provisions, with DBS booking $1.9 billion; OCBC, $1.4 billion; and UOB, $0.7 billion; in allowances. “OCBC estimates gross NPL [non-performing loan] ratio to increase to 2.5% - 3.5% while UOB sees its NPL ratio possibly doubling to 3.2%.”
“Since the correction in share prices of Singapore banks in mid-June, we believe the market has been increasingly pricing in escalating concerns on the expiry of loan moratoriums across geographies and potential increase in NPLs through 2H2020,” says Lim.
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Lim adds that UOB is a “more defensive pick” due to its larger domestic exposure, higher ROE and slightly higher dividend yield of 3.9%, compared to OCBC’s 3.6%. “Meanwhile, we remain cautious over OCBC’s larger exposure to regional SMEs in Hong Kong and Indonesia.”
OCBC Bank missed expectations in 2Q2020 owing to higher-than-expected credit cost, say CGS-CIMB analysts Andrea Choong and Lim Siew Khee in an August 7 note.
“OCBC’s 2Q2020 net profit of $730 million was 14%/24% below our/consensus estimated $847 million/$958 million. 1H2020 net profit formed 38%/40% of our/consensus forecasts,” say Choong and Lim.
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Similarly, Maybank analyst Thilan Wickramasinghe says OCBC Bank is “not yet shipshape” and could expect a muted return to normal for the group’s ASEAN businesses given the various stages of lockdowns, though North Asia may be a bright spot.
“Management struck a cautious tone on growth with a focus on cost management in the near term. 25% of loans are in North Asia, which may be a bright spot given earlier lifting of lockdowns there. But this may not be enough. 2Q2020 loan growth in Greater China was 6% y-o-y whereas Singapore was flat and ASEAN fell 3% for the Group,” he notes in an August 7 report.
Wickramasinghe is maintaining “hold” on OCBC Bank with a lowered target price of $9.06.
On DBS, PhillipCapital analyst Tay Wee Kuang notes that the bank’s 2Q2020 earnings exceeded its previous estimate by 21% and its non-interest income provides relief to short-term troubles due to Covid-19. Tay is maintaining “accumulate” with a raised target price of $21.00.
“Other non-interest income jumped 45% y-o-y in 2Q2020 due to profit realisation from fixed income securities. This contributed to a 3.6x jump in net income from investment securities in 1H2020 to $663 million from $184 million in 1H2019.”
“The bank has noted that it is currently holding $1.5 billion of unrealised mark-to-market gains in investment securities. This may allow the bank to provide income buffer against the weakness observed across other income sources,” says Tay.
Overall, the banks’ asset quality trends are still within guidance, say CGS-CIMB analysts Choong and Lim in an updated note on August 10.
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CGS-CIMB is recommending “hold” on all three banks, with a target price of $9.19 for OCBC Bank, $20.46 for DBS, and $20.58 for UOB.
Choong and Lim say DBS is most progressive in building up credit costs, while UOB is the least. “The proportion of group loans under moratorium is largest for UOB at 16% vs 10% at OCBC and 5% at DBS. We expect UOB’s credit costs to remain elevated, but for DBS and OCBC’s to taper off in 2H2020.”
CGS-CIMB prefers DBS first, followed by UOB, then OCBC. “DBS is confident of sustaining DPS if not for MAS’ guidance; we keep our hopes up for a recovery in DPS come FY2021F. Unexpected credit costs and volatile treasury income make OCBC our least preferred, for now. Barring a second wave of Covid-19, we think the negative sentiment has been priced in.”
As at 12.10pm, shares in DBS are trading at 39 cents higher, or 1.89% up, at $20.99; while shares in OCBC Bank are trading at 9 cents higher, or 1.03% up, at $8.81; and shares in UOB are trading at 9 cents higher, or 0.46% up, at $19.57.
