(Nov 11): Amid a slowing economy, banks are being increasingly looked upon as yield plays. A Goldman Sachs report last month said real estate investment trusts had outperformed the Singapore MSCI Index by 16% so far this year, owing to the sustainability and predictability of distributions. “Banks now yield 5% (based on Goldman’s forecast for FY2020) and there is scope for up to 4% dividend per share growth annually,” the report says.
For instance, Oversea-Chinese Banking Corp’s common equity tier 1 ratio grew more than its risk-weighted assets (RWAs). If this continues, the bank will be accumulating excess capital, which it can pay its shareholders. In 1HFY2019, OCBC’s dividend payout ratio was just 43.47%. Goldman reckons OCBC has the potential to raise this figure to 60%.
By the numbers, CET1 grew 1.9% q-o-q even though OCBC’s retained earnings was flat q-o-q. This is because its scrip dividend raked in some $843 million, according to OCBC CFO Darren Tan. OCBC’s ordinary share capital rose $865 million to $17.3 billion as at Sept 30, from $16.4 billion as at June 30. In the meantime, loan growth was flat q-o-q at $263 billion. Thus, RWA grew just 1.7%. As a result, OCBC’s CET1 ratio remained unchanged q-o-q at 14.4%, the highest among the three local banks.
OCBC’s CET1 ratio could improve next year, since OCBC Wing Hang has already submitted its models to compute RWA to regulators. “Management expects significant RWA reduction from the implementation of internal ratings- based approach, which is scheduled to be completed by end-2020,” UOB Kay Hian says in an update.
In 3QFY2019, OCBC reported a 6% y-o-y and 4% q-o-q decline in net profit to $1.2 billion. On outlook for next year, OCBC CEO Samuel Tsien expects loan growth to be tepid “in the low single digits”. At a results briefing on Nov 5, he says: “Year-to-date growth is 2% to 3% and that could be maintained for 2020 over 2019.” He recalls that, during the 2QFY2019 results briefing, he had already guided that loan growth was going to be in that range.
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In addition, OCBC’s net interest margins — which rose five basis points y-o-y but fell 2bps q-o-q — could also be somewhat lacklustre next year. Tsien expects NIMs for this year to be better than 2018’s 1.69%, narrowing by 5bps next year from the 1.77% attained for the first nine months of 2019.
On a sombre note, credit costs may remain elevated next year. In applying the expected credit loss methodology, OCBC is taking into account the weaker market outlook and heightened geopolitical risks. Thus, additional allowances were made in 3QFY2019 based on “macroeconomic variables” in the ECL model. Under ECL Stage 1 and 2 — the equivalent of general provisioning — allowances were made for non-impaired loans. In addition, some loans were downgraded to Stage 3 (the equivalent of specific provisions). Allowances rose to $179 million in 3QFY2019 versus $111 million in 2QFY2019.
Also, the non-performing loan ratio rose to 1.58% in 3QFY2019, from 1.47% in 2QFY2019. NPL balance increased 7% q-o-q, owing to the downgrade of two corporate accounts, one of which was an offshore support vessel company and the other a transportation company.
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On the other hand, wealth management continues to do well, and net fee and commission income in 3QFY2019 rose 10% y-o-y and 6% q-o-q to $550 million.
OCBC’s scrip dividend has been popular with investors, who elected to have around 75% of the dividend payout in scrip. UOB Kay Hian forecasts a net profit of $4.8 billion for OCBC for this year, declining to $4.6 billion next year, versus consensus of $4.8 billion this year and $4.9 billion next year.
United Overseas Bank’s net profit rose 8% y-o-y but fell 4% q-o-q to $1.1 billion as credit costs rose to $145 million million from $45 million in 2QFY2019. Although UOB’s retained earnings rose a marginal 0.7% q-o-q, CET1 fell 0.96% q-o-q, while RWA inched up 0.25% for the same period, causing CET1 ratio to ease 20bps q-o-q to 13.7%.
According to Credit Suisse, UOB’s management guided for mid-single-digit, broad-based loan growth for next year. If the Singapore interbank offered rate falls 30bps to 50bps, NIM in FY2020 could decline by 5bps to 10bps next year, compared with this year’s nine-month NIM of 1.79%, Credit Suisse says.
It remains positive on UOB. “We have factored in the stronger-than-expected non-interest income and weaker NIM into our model, resulting in a 0.2% to 2.3% increase in our earnings forecasts for 2019 to 2021. With the weaker outlook for 2020, the current return on RWA of 1.94% could decline 5bps to 10bps,” it says. Credit Suisse forecasts net profit of $4.3 billion this year, and $4.3 billion next year, which gives UOB room to accumulate retained earnings.
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At a 2QFY2019 results briefing, the bank’s top management said it was comfortable with return on RWA of 1.8% to maintain a 50% payout ratio. In 1HFY2019, UOB’s payout ratio was 42%. If this continues for 2HFY2019, its dividend yield would be 4.08%, compared with OCBC’s dividend yield of 4.49%.
“In the current environment, investors are likely to continue to opt for a dividend-focused strategy. Singapore banks would fall under the steady, defensive and pure high-yield categories,” Goldman concludes.
DBS Group Holdings reports 3QFY2019 results on Nov 11, and the consensus net profit forecast by Bloomberg is $1.6 billion.
