瑞信-亚太地区-银行业-新加坡银行业：运行安全-2019.5.30-39页 (2).pdf

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES,ANALYST CERTIFICATIONS,LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS.US Disclosure:Credit Suisse does and seeks to do business with companies covered in its research reports.As a result,investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report.Investors should consider this report as only a single factor in making their investment decision.30 May 2019Asia Pacific/SingaporeEquity ResearchBanks Singapore Banks Sector ASSUMING COVERAGEResearch AnalystsNicholas Teh65 6212 3026nicholas.tehcredit-Kylie Wan65 6212 3004kylie.wancredit-Flight to safetyFigure 1:Risk-reward most favourable for UOBS$24.49S$11.37S$23.52UOBOCBCDBSDownside to grey skyUpside to base caseCurrent priceBase case=S$29.7(+22%upside)Base case=S$11.9(+9%upside)Base case=S$28.4(+14%upside)Grey sky=S$23.1(5%downside)Grey sky=S$9.2(16%downside)Grey sky=S$21.7(13%downside)Source:Company data,Credit Suisse estimatesDecent risk-reward.With slowing economic growth and uncertainty over interest rate direction,our base case assumes flat-to-declining ROEs for Singapore banks in 2019-21E.In our view,DBS and UOB have the most levers to drive higher NIM from 1Q19 levels,with key risks being higher loan competition mitigating pass-through of higher rates and potential US rate cuts.By our estimates,a 50 bp reduction in the US rate would affect DBS the most(-7.5%to net profit),then OCBC(-5.7%),and UOB(-4.7%).Our grey-sky analysis suggests that potential earnings cuts are partially priced in,particularly for UOB,where there might be just 5%further downside should there be no loan growth,flat NIM,and higher credit cost.UOB should have the least volatile NOII.Capital-market-related non-interest income(NOII)is the lowest for UOB(16%vs 18-21%for DBS/OCBC in 2018)hence UOB should be less susceptible to swings in market sentiment.Trading income is the most volatile component of NOII.While trading income is the largest contributor to DBS earnings,it exhibits most volatility for OCBC.Switch to UOB.We assume coverage of Singapore banks.UOB(OUTPERFORM,TP S$29.70)is our top pick,as it has the most stable earnings base and least volatile NOII,and offers the best risk-reward in different scenarios.We see DBS(OUTPERFORM,TP S$28.40)providing the most certainty on dividends(4.8%yield),with its long-term digital strategy intact.We expect OCBCs(NEUTRAL,TP S$11.85)ROE to see a declining trend moving forward on its build-up of excess capital to address volatility in the macro environment and potential acquisition opportunities.30 May 2019Singapore Banks Sector2Focus charts and tableFigure 2:Slowing GDP growth and peaking interest rates a concern for returnsFigure 3:Interest rate movements have remained favourable so far0.000.501.001.502.002.503.003.504.00-10.00-5.000.005.0010.0015.0020.0025.001Q02 1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 1Q18 1Q19Nominal GDP YoY3M SIBOR(RHS)(%)(%)0.00.51.01.52.02.51.51.61.71.81.92.02.11Q114Q113Q122Q131Q144Q143Q152Q161Q174Q173Q182Q19DBS NIMUOB NIMOCBC NIM3M SIBOR(RHS)(%)(%)Source:Company data,Credit Suisse estimatesSource:Company data,Credit Suisse estimatesFigure 4:UOB least sensitive to risk from US rate cutsFigure 5:UOB has the lowest proportion of capital-market-related NOIIDBSUOBOCBCInterbank assets&liabilities-52-90-86Customer loans&deposits-433-124-203Interest rate impact(485)(214)(288)FY20 net profit6,4974,5185,103%impact for-50bp hike(7.5)(4.7)(5.7)FY20 Net interest income10,2027,0666,721FY20 NIM(%)1.911.841.79Net interest income-post 50bp decrease9,7176,8526,433NIM-post 50bp decrease1.811.781.71NIM Ch(%)-0.091-0.056-0.077Base case ROA(%)1.121.091.04Implied ROA on 50 bps cut(%)1.031.030.98Base case ROE(%)12.711.610.9Implied ROE on 50 bps cut(%)11.811.110.321%16%18%5%10%15%20%25%30%2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018DBSUOBOCBCSource:Company data,Credit Suisse estimatesSource:Company data,Credit Suisse estimatesFigure 6:Peaking ROEs for the Singapore banksFigure 7:Risk-reward looks most favourable for UOB8.09.010.011.012.013.014.0201020112012201320142015201620172018 2019E 2020E 2021E DBS UOB OCBC(%)S$24.49S$11.37S$23.52UOBOCBCDBSDownside to grey skyUpside to base caseCurrent priceBase case=S$29.7(+22%upside)Base case=S$11.9(+9%upside)Base case=S$28.4(+14%upside)Grey sky=S$23.1(5%downside)Grey sky=S$9.2(16%downside)Grey sky=S$21.7(13%downside)Source:Company data,Credit Suisse estimatesSource:Company data,Credit Suisse estimates30 May 2019Singapore Banks Sector3Flight to safetyDecent risk-rewardIn the current macro environment,Singapores GDP growth is expected to slow below 2.5%,while the interest rate environment looks to be peaking.The banks have achieved ROEs of 11.3-12.1%in 2018,driven by NIM expansion and lower credit cost,while NOII was weak.We believe NIM will continue to expand in 2019,driven by(1)already higher SOR/SIBOR staying stable and(2)delayed repricing of loans on the back of the four rate hikes in 2018.UOB and DBS look to have more drivers for NIM expansion in the near term.Meanwhile,the key risk to NIM would be(1)rising loan competition mitigating further pass-through of higher rates and(2)US rate cuts.Our house view is for no change in US rates in 2019 and one hike in 1H20;however,the risk of insurance cuts would become increasingly likely if the trade conflict does not de-escalate in the next few months.We estimate that in a scenario of 50 bp US rate cut,DBS would be the most exposed and see a 7.5%impact to its 2020 net profit,OCBC would see a 5.7%impact,and UOB would see a 4.7%impact.With slowing GDP growth,loan growth is expected to slow in tandem;and after a strong start to the year,UOB looks most likely to meet its full-year guidance of mid-single-digits.Leverage is unlikely to be driven by asset growth,and we expect UOBs and DBSs leverages to decline at a stable pace and OCBCs to decline more sharply.This leads to an outlook of peaking ROE for DBS and UOB,and declining ROE for OCBC.UOB should have the least volatile NOIINOII makes up 32-39%of Singapore banks total income,and capital-market-related NOII(trading income,wealth management fees,IB fees,etc.)contributes a larger portion of DBS and OCBCs total income(18-21%in 2018)than UOBs(16%).We also find that trading income,which is the most volatile component,accounts for the highest proportion of DBSs income(9-15%over the last five years),while OCBCs trading income seems to be most volatile.Wealth management fees account for 9%of DBS and OCBCs total income(only 6%for UOB);it is also a source of volatility,with DBS wealth management fee yields showing a variance of 0.4-0.6%,but structural growth in AUM should provide some stability.While credit cost can be a key source of volatility,we expect it to remain benign for now.CET 1 ratios are all also at very healthy levels of 13.9-14.2%,and near-term RWA(risk-weighted assets)efficiency gains seem to have been fully implemented.In the longer term,OCBC could see further RWA efficiency from Wing Hang moving to(internal-ratings-based approach)IRB(possibly in end-2020),while UOB could see further improvement to capital from disposing non-core assets(Evergrowing Bank).Switch to UOBWe assume coverage on Singapore banks,with UOB as our top pick in the sector.We believe UOB offers the best risk-reward trade-off,has the most stability in earnings given its lower volatility in NOII,lowest exposure to potential rate cuts,with several levers to drive NIM expansion in the near term,and is the most under-owned by institutions.We have retained our OUTPERFORM rating on DBS and believe it provides the most certainty on dividends.We expect OCBCs ROE to show the sharpest decline moving forward mainly due to a more rapid build-up of capital from its conservative dividend policy(scrip dividend and lower payout).While the higher excess capital provides a bigger defensive buffer,there is also M&A risk as management has expressed the possibility of using the capital for acquisition opportunities that could arise from the volatile markets.Room for NIM expansion in 2019DBS most exposed to rising risk of US rate cutsUOB has lowest proportion of capital markets related NOIICredit cost environment to remain benignSwitch to UOB,most stable earnings profile and under-owned 30 May 2019Singapore Banks Sector4Valuation comparisonFigure 8:Singapore banks valuations comparison20152016201720182019E2020E2021EP/B(x)DBS1.61.51.41.31.31.21.1 UOB1.41.31.21.11.11.00.9 OCBC1.41.31.21.11.11.01.0Cash core ROE(%)DBS11.310.39.912.112.812.712.7 UOB11.110.410.311.411.611.611.6 OCBC12.610.411.611.811.410.910.7P/E on reported EPS(x)DBS14.014.814.511.410.39.89.2 UOB12.512.711.810.19.69.08.4 OCBC11.513.111.110.39.99.89.6Dividend yield(%)DBS2.42.45.74.84.85.25.2 UOB3.72.94.14.94.95.35.3 OCBC3.33.33.43.94.14.34.5Cash core ROA(%)DBS0.960.900.881.051.111.121.14 UOB1.000.940.971.071.061.091.12 OCBC1.000.890.981.001.031.041.05Cash core profit growth(%)DBS12.4-1.93.628.110.34.76.0 UOB-1.4-0.29.418.35.66.76.5 OCBC13.7-9.519.18.16.64.24.3Source:Company data,Credit Suisse estimatesFigure 9:Singapore banks price performancePriceTargetMkt capRatingS$S$S$bn1M3M6M 12M YTD 2018 2017 2016DBSM.SIDBSOP24.8528.4063.7-12.50.02.8-14.84.9-3.1 43.33.9UOBH.SIUOBOP24.1129.7040.5-13.2-2.9-3.3-17.1-1.2-7.1 29.74.0OCBC.SIOCBCN10.8911.8546.4-10.1-1.5-3.1-16.2-3.3-9.1 38.91.4.FTSTISTI3,163-7.2-1.51.7-10.13.1-9.8 18.1-0.1Price performance(%)Source:The BLOOMBERG PROFESSIONALTM service,Credit Suisse estimates30 May 2019Singapore Banks Sector5Table of contentsFocus charts and table2Flight to safety3Decent risk-reward.3UOB should have the least volatile NOII.3Switch to UOB.3Valuation comparison4Decent risk-reward6Still room for expansion in 2019.7What if we see US rate cuts?.9Loan growth slowing as expected.10Digital initiatives provide a case for better returns in the long run.12UOB should have the least volatile NOII15OCBCs trading income seems most volatile.16No signs of spiking credit cost.18Switch to UOB21ROE trajectory is stable for UOB and DBS,declining for OCBC.21DBS has the safest dividend yield.23UOB most under-owned.24Share price volatility from the trade war.25Comparison with previous cycles.26How much downside in a grey sky scenario?.27United Overseas Bank Ltd(UOBH.SI/UOB SP)29DBS Group Holdings Ltd(DBSM.SI/DBS SP)31Oversea-Chinese Banking Corp Ltd(OCBC.SI/OCBC SP)3330 May 2019Singapore Banks Sector6Decent risk-rewardThe Singapore banks ROEs have recovered over the past two years,driven by NIM expansion,loan growth,and a benign credit environment.As a result,P/B valuations have also recovered and peaked in mid-2018.Since then,key macro drivers of rising rates and GDP growth have started to slow.The current market environment is that of slowing GDP growth vis-vis peaking interest rate.GDP is expected to slow below 2.5%in 2019 vs 3.2%in 2018.Meanwhile,our US economist expects no US rate hikes in 2019 and only one hike in 1H20(after four hikes in 2018).Although there is increasing risk of insurance rate cuts if the trade conflict does not de-escalate in the next few months.Figure 10:Peaking interest rates and slowing GDP growth in Singapore0.000.501.001.502.002.503.003.504.00-10.00-5.000.005.0010.0015.0020.0025.001Q02 1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 1Q18 1Q19Nominal GDP YoY3M SIBOR(RHS)(%)(%)Source:Company data,Credit Suisse estimatesThe banks have achieved ROEs of 11.3-12.1%in 2018 on the back of ROAs at 0.97-1.07%.These returns were driven by NIM expansion and lower credit cost,while weaker NOII was a somewhat of a drag.Given the current environment,we discuss how much room there is to improve those returns from here.30 May 2019Singapore Banks Sector7Figure 11:Singapore banks ROE trend12.111.311.56.08.010.012.014.016.018.020022003200420052006200720082009201020112012201320142015201620172018 DBS UOB OCBC(%)Source:Company data,Credit Suisse estimatesStill room for expansion in 2019NIM is a key driver of ROA,and without any US rate hikes in 2019,the key driver for NIM will be:1.Already higher SOR/SIBOR staying stable,and 2.Delayed repricing of loans on the back of the four rate hikes in 2018.UOB and DBS should have more scope for near-term NIM expansion With SIBOR rising since 2016,DBS has seen a steady sequential expansion in NIM,while OCBCs expansion was rather lumpy over the last year.So far,UOBs NIM expansion has been the most disappointing,with four consecutive quarters of NIM compression due to higher funding cost.Figure 12:Singapore banks NIM vs 3M SIBOR0.00.51.01.52.02.51.51.61.71.81.92.02.11Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 1Q18 3Q18 1Q19DBS NIMUOB NIMOCBC NIM3M SIBOR(RHS)(%)(%)Source:Company data,Credit Suisse estimatesAt this juncture,we believe UOB and DBS will have more drivers to see near-term NIM expansion.In particular,these drivers are:30 May 2019Singapore Banks Sector8(1)DBS benefits most from the higher SOR/SIBOR.SOR/SIBOR movements have remained favourable for the Singapore banks so far,with 3M SIBOR taking another step up to 2.01%in May.This is partly due to the depreciation of the SGD which looks to have offset the decline in the 3M USD LIBOR.DBS is the most sensitive of the three banks to US rate movements,with 84%of its loans in US-rate-related currencies(USD,HKD,or SGD).UOB is the least exposed,with only 66%of its loans in those currencies.DBS also has the highest CASA ratio,at 58%,vs OCBCs and UOBs 47%and 43%,respectively.Figure 13:Proportion of loan book in USD/HKD/SGDFigure 14:Singapore banks CASA ratiosSource:Company data,Credit Suisse estimatesSource:Company data,Credit Suisse estimates(2)UOB and DBS will still see more flow through from mortgage rate hikes from 2Q onwards.UOB raised the board rates for its mortgage loans by 50 bp in batches during February-March 2019;hence,these should have more of an impact in the coming quarters.In comparison,DBS saw a 15 bp increase in January and 40 bp increase in March,while OCBC raised mortgage rates by 55 bp in January.(3)UOB could see relief on funding cost moving forward.Despite having the fastest loan growth in 1Q19,UOB was the only bank to see LDR decline QoQ,as deposits grew even faster(largely driven by expensive fixed deposits).This was partly due to the bank being too conservative on pre-funding for potential loan drawdowns that did not materialise.Moving forward,management is looking to employ a more disciplined approach to prefunding;and the slower loan growth that it expects for the rest of the year should ease prefunding drawdowns and allow the bank to(i)be more selective on loans(which should allow for higher loan yields)and(ii)release excess deposits which are invested in short-duration,lower-yielding securities.Figure 15:Singapore banks LDRFigure 16:Singapore banks QoQ loan growth87.9%86.6%87.2%80.0%82.0%84.0%86.0%88.0%90.0%92.0%94.0