SINGAPORE (Feb 24): Banks appear to have had a good run in FY2019, as DBS, OCBC and UOB lifted their dividends by 10%, 22% and 8.3% respectively. 

Apart from dividends, all three banks also reported higher earnings in 4QFY2019 ended December. DBS reported a 14.3% increase in earnings to $1.51 billion, while OCBC booked a 34.2% spike in earnings to $1.24 billion. Not to be outdone, UOB too posted earnings of $1.01 billion, a y-o-y increase of 10%. 

See: DBS posts 14% rise in 4Q earnings to $1.51 bil; FY19 net profit, total income soar to new highs

See: Strong 4Q showing drives OCBC's FY19 earnings to record high of $4.87 bil; proposes 22% higher final dividend of 28 cents per share

See: UOB posts record high earnings of $4.34 bil in FY19 despite slowing q-o-q in fourth quarter


In a Friday report, UOB Kay Hian lead analyst Jonathan Koh notes that DBS and OCBC had ousted the brokerage’s expectations, while  UOB’s results came in marginally below consensus estimates. 

“Our positive view on Singapore banks rest on their attractive dividend yields of above 5%, which differentiate them from their regional peers,” shares Koh. 

“We see dividend paid out as sustainable due to Singapore banks’ robust Tier 1 Capital Ratio (CET-1 CAR),”  adds Koh. 

In terms of CET-1 CAR, which measures a company’s capital adequacy, Koh notes that OCBC scored the highest at 14.9%, boosted by retained earnings and its scrip dividend scheme. DBS and OCBC were also noted to have robust CET-1 CAR figures of 14.1% and 14.3% respectively. 

Although banks have rounded up FY2019 on a positive note, analysts remain divided on sector, especially due to the ongoing Covid-19 virus outbreak. 

Bleak near-term outlook

The way CGS-CIMB analyst Andrea Choong sees it, banks are in for a tough time ahead, especially in the near-term. For DBS, Choong says that revenue could be impacted by 1-2% in FY20, while exposures at risk from the virus could amount to some $2 billion. 

“Impairments from this book could amount to 4-5bp if the virus dissipates by summer,” adds Choong. 

Maybank Kim Eng Research analyst Thilan Wickramasinghe expects the virus outbreak to rake in elevated credit costs for OCBC, due to risks from customers and slower North Asian growth. 

“Given the rapidly evolving situation and potential for a prolonged outbreak, we estimate credit costs of 20- 34 basis points in 2020-2022E. We also expect non performing loans (NPLs) to rise to 1.7% by 2021E (from 1.5%) from supply chain disruptions and falling consumption,” says Wickramasinghe. 

Phillip Capital analyst Tay Wee Kuang agrees, highlighting how OCBC’s allowances may be strained as a result of the virus, despite improvements in asset quality. “The outbreak has a potential impact on up to 10% of the loan book by the bank,” says Tay. 

For UOB, Tay notes that the bank has taken an active stance to de-risk North Asia exposure, which may in turn insulate the impact of short-term risks. 

“On expectations of greater headwinds arising from Greater China, the bank  has been actively managing exposures to the region to reduce short-term risks,” says Tay, adding that the bank’s total Greater China exposure currently stands at 15% of total assets, with potential vulnerable industries within Hong Kong constituting 8% of this. 

Nevertheless, Tay highlights that UOB will not be spared from the effects of Covid-19. “Net interest margins (NIM) compression will stunt net interest income (NII) growth in FY20E
and non-interest income may also be dented from weaker market sentiments with the outbreak of Covid-19,” shares Tay. 

Focus on long term sustainable yields

Yet, analysts are not shying away from banks, nor are they advising investors to turn their backs on them. 

CGS-CIMB’s Choong hones in on the efforts taken by banks to mitigate the impacts of the virus. For instance, OCBC is set to offer financial support to both retail and corporate customers in several of its regional markets. 

“The measures include a restructuring of mortgages and business loans, a moratorium on principal repayments, and the extension of bridging loans to affected businesses,” says Choong. 

UOB, too, has announced some $3 billion in relief assistance to affected SMEs, including a
moratorium on principal repayments for up to one year and extension of working capital facilities by up to $5 million.

Maybank’s Wickramasinghe says that OCBC’s progressive dividend approach will see the bank paying out an equivalent of the previous year’s per share quantum, at the least. 

“Management also claims they are not looking at any immediate transactions for mergers and acquisitions. Overall, this lowers a significant portion of uncertainty in terms of OCBC’s capital deployment and yield visibility, in our view,” says Wickramasinghe. 

UOB Kay Hian’s Koh says that while the outlook for growth remains muted for banks, investors should focus on the long term yields that they offer. “Banks’ share prices are likely to suffer bouts of volatilities due to the outbreak of COVID-19 during 1H20,” says Koh, adding that banks could evolve into “yield plays.”

On the whole, both UOB and CGS-CIMB are maintaining their “overweight” calls on the banking sector in light of the individual strengths of banks and their measures to mitigate the adverse impacts of Covid-19. 

Both UOB and CGS-CIMB are maintaining their “buy” calls on DBS with target prices of $28.00 and $27.09 respectively. 

Meanwhile, analysts remain divided on OCBC. UOB and Phillip Capital have “buy” calls with respective target prices of $12.68 and $12.10, while Maybank and CGS-CIMB have “hold” calls with target prices of $11.57 and $11.94 respectively. 

Both Phillip Capital and CGS-CIMB are keeping “add” calls on UOB with target prices of $27.80 and $29.10 respectively. 

As at 12.36pm, shares in DBS are trading 15 cents lower, or 0.6% down, at $24.93 while shares in OCBC are trading nine cents lower, or 0.8% down, at $10.93. 

Meanwhile, shares in UOB are trading 37 cents lower,or 1.4% down, at $25.31.