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Singapore banks' 3Q earnings beat expectations due to treasury income, says CGS-CIMB

Jovi Ho and Felicia Tan
Jovi Ho and Felicia Tan • 7 min read
Singapore banks' 3Q earnings beat expectations due to treasury income, says CGS-CIMB
The rest of the analysts mostly recommend investors ‘buy’ DBS and UOB, and ‘hold’ on to OCBC.
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In a Nov 5 note, CGS-CIMB analysts Andrea Choong and Lim Siew Khee are maintaining their “neutral” call on the Singapore banking sector following the release of their 3QFY2020 results on Nov 4 and 5.

Choong and Lim have also recommended “hold” on DBS and OCBC with target prices of $20.46 and $9.38 respectively, and “add” on UOB, with a target price of $22.52.

DBS and OCBC, on Nov 5, posted earnings of $1.30 billion and $1.03 billion respectively, beating the brokerage’s and consensus estimates for the quarter.

OCBC is trading at 0.8x FY20F price-to-book value (P/BV). “Results beat expectations mainly due to lower-than-expected impairments. Credit cost guidance is unchanged, although non-performing loans (NPL) may still trend upwards towards 2.5-3.5%. There was also a noticeable reduction in group loans under moratorium to approximately 5% (from 10%),” say the analysts.

OCBC’s impairments of $350 million (vs. CGS-CIMB’s expected $450 million) came up to 52 basis points (bp) of credit costs. Credit cost guidance was unchanged at 100-130bp over FY20-21F and for NPL ratio at 2.5-3.5%. NPL was unchanged at 1.6% (2Q20: 1.6%).

UOB is trading at 0.8x FY20F P/BV. “Going forward, net interest margin (NIM) is likely to be sustained or trend upwards, a reversal of trends compared to peers. Group loans under moratorium reduced to approximately 10% (from approximately 16%). Asset quality visibility underpins our expectations of lower y-o-y credit costs in FY21F,” note Choong and Lim.

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“DBS’ 3Q20 net profit of $1.3 billion (+4% q-o-q, -20% y-o-y) surpassed our/consensus estimates by 16% and 24% [respectively]. We projected $1.1 billion,” say the analysts.

9M20 net profit formed 91% of CGS-CIMB’s forecasts, and 82% of consensus forecasts. “Treasury income of $608 million (-18% q-o-q, +11% y-o-y) was above our $470 million.

DBS is trading at 1.1x FY20F P/BV. “3Q20 earnings were above expectations, mainly on stronger-than-expected treasury income. We expect FY2021F impairments to be lower y-o-y, although NPA formation may still trend upwards as government relief expires,” note Choong and Lim.

See also: RHB lifts SGX’s TP to $10.40 after strong operating data in May

Further on DBS, Maybank analyst Thilan Wickramasinghe sees “resilient delivery” as its business mix is geared towards regional recovery. “Strong fee income from its wealth management franchise helped and this momentum should pick up going forward,” he says.

“Concurrently, its exposure to North Asia and large corporate client mix should support DBS leading operational recovery ahead of peers who have larger SME footprints. Asset quality remains an overhang, but significant provisioning cover exists. Dividend caps continuing to 2021E remains a strong likelihood, but DBS’ absolute dividend policy provides better visibility than peers,” says Wickramasinghe.

Wickramasinghe is maintaining his “buy” call on DBS, with a raised target price of $24.63 from $22.90.

He notes that DBS management claims visibility remains low on moratorium loans in terms of NPL impact once support schemes wear off.

“It is conducting cash flow forecasting on these accounts using AI and machine learning to keep ahead of any potential risks. While credit charge guidance is unchanged (100-130bps 2020-2021) we believe most will be frontloaded in 2020E (83bps) and it will fall to 33bps next year to reach midway of guidance. 2022E charges should also remain elevated, from potential spillovers of NPLs.”

RHB’s research team has upgraded DBS to “buy” from “neutral” with a raised target price of $25.20. “Taking into account the better-than-expected fee income and some downward adjustments in operating expenses, we raise net profit by 7% for FY20F and 16% for FY21F.”

Finally, OCBC Investment Research analysts are recommending “buy” on DBS, with a target price of $24.50.

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“The accelerated front loading of provisions taken in 1HFY2020 (approximately $2.5 billion, vs $3 billion to $5 billion range over two years guided) helps to provide some comfort although asset quality trends remain an area to monitor next year as we approach the expiry of government support schemes while NIM should remain subdued in a prolonged low interest rate environment. Upcoming quarters should continue to provide clarity on the unfolding impact of the viral outbreak on loans and asset quality while the bank continues to add further to provisions,” says OCBC.

On OCBC, DBS Group Research, Maybank Kim Eng and RHB Research have maintained their “hold” or “neutral” call on Oversea-Chinese Banking Corporation (OCBC).

All three brokerages have also upped their target prices on the counter to $9.50 (from $9.30), $9.29 (from $9.06) and $9.50 (from $8.70) respectively.

Despite the stabilising outlook for the bank, DBS analyst Lim Rui Wen feels there are limited catalysts for the stock amid the zero-rate environment and uncertain economic recovery.

Lim adds that the bank may face further net interest margin (NIM) pressures in 4QFY2020 in the region amid muted loan growth.

“We remain conservative over OCBC’s income outlook into FY21-22F; we believe that management is likely to continue adopting strict cost discipline to manage its bottom line,” says Lim as she reduces her earnings estimates on lower-than-expected credit costs.

For the 9MFY2020, OCBC’s return-on-equity (ROE) was 7.0%, the lowest among its peers, while its CET ratio of 14.4% was the highest.

“While OCBC maintains that there are no M&A plans under review, OCBC continues to guide for discount on its scrip dividend, and with that surplus capital continues to be weighed by dividend cap policy in the meantime, in our view. As the historical take-up for OCBC’s scrip dividend has been high, this might weigh on OCBC’s ROE in the near term,” she says.

Maybank’s Wickramasinghe views “significant macro-risks from uneven economic recoveries” in the region may keep “NPL risks on the upside and operational improvements on the downside”.

“Also, in the near term, dividend caps may prevent any bottom line improvements converting to better yields,” he notes.

To this end, he has lowered his estimates for 2020 by 4% on higher provisions and lower NIMs.

“We believe the MAS dividend cap may remain in place for 2021E as a capital preserver. As a result, operational improvements may not translate to better yield,” he adds.

Meanwhile, the team at RHB has raised its projected net profit up by 12% for FY2021F on adjusted credit cost to reflect the front loading of impairment charges in FY2020F.

“Still, FY20F earnings are relatively unchanged as the upward revision in credit cost is offset by higher estimates of non-II and lower opex,” they say.

On UOB, DBS’s Lim and the team at OCBC have maintained their “buy” calls on the bank, while Maybank’s Wickramasinghe has rated “hold” on the bank.

For Wickramasinghe, UOB may have had a better NPL outlook but upside to yields remain uncertain.

“Lowered credit charge guidance and limited NPL formation despite moratoriums unwinding are positive developments. Nevertheless, the operating environment remains uncertain and low NIMs are likely to continue. We believe improved PAT from lower provisions may not flow through to higher dividends in 2021E given regulatory moratoriums. This may cap yields in the near term,” he says.

Wickramasinghe also sees operational uncertainty in the bank. While UOB’s management claims its NIMs have bottomed in 3QFY2020, he believes recovery may be “some way off” given expectations of lower policy rates regionally.

Wickramasinghe has raised UOB’s target price to $21.24 from $20.79 previously.

DBS’s Lim and OCBC’s team have, on the other hand, maintained their target prices of $22.20 and $21.50 respectively.

Despite UOB’s dividend cut, Lim sees its yield of 4% “relatively attractive” as UOB’s management indicates a willingness to revert to its FY2019 dividend policy.

“As we expect some asset quality deterioration into 2H20 and 1H21, especially when the various moratoriums and reliefs expire, we believe the upside is capped below 1.0x P/BV,” she says.

On potential catalysts to the counter, Lim says lower-than-expected credit costs could drive the bank’s earnings while a recovery in ROE after Covid will drive its share price.

However, Lim remains “conservative over UOB’s income outlook into FY2021- 2022F”.

“We believe that management is likely to continue strict cost discipline to manage bottom line,” she adds.

For OCBC, UOB’s valuations are deemed “undemanding”, and offers an attractive risk reward proposition for “patient investors”.

“Providing exposure to Southeast Asia’s growth and as the third largest weighted stock on the MSCI Singapore index, UOB also benefits from an improved risk-taking environment and pick up in regional liquidity inflows,” says the team.

As at 3.40pm, shares in DBS are trading at 4 cents higher, or 0.18% up, at $22.47; while shares in OCBC are trading 1 cent higher, or 0.11% up, at $8.94; and shares in UOB are trading flat at $20.44.

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