20140505-Maybank_KERPL-Singapore_Banks_17页_1mb

Singapore Banks Summary

Core Content

• Overall Performance: Singapore banks, specifically DBS, OCBC, and UOB, delivered strong quarterly results in 1Q14, with DBS leading the pack, followed by OCBC and then UOB.
• Net Interest Margin (NIM): A significant quarter-over-quarter (QoQ) increase in NIM was the main surprise, with DBS showing a strong 5bps rise, OCBC and UOB also seeing improvements.
• Earnings Drivers: Greater China was the key earnings driver, contributing to the strong performance of DBS and OCBC through increased loan growth and fee income. UOB, being less exposed to Greater China, did not benefit as much.
• Asset Quality: Banks maintained sound asset quality with a decline in the gross non-performing asset (NPA) ratio, particularly for DBS, which saw a 8.9% QoQ drop to 1.1%.
• Liquidity: Singapore banks kept their SGD balance sheets liquid, with DBS at 73% loan-to-deposit ratio (LDR), OCBC at 79%, and UOB at 95%.
• Earnings Revisions: The analyst raised FY14E–16E EPS forecasts by up to 15.9% for DBS, 14.6% for OCBC, and 5.6% for UOB, based on improved NIM, fee income, and lower credit charges.
• Target Prices (TPs): TPs for all three banks were raised by approximately 4%, with DBS and UOB maintaining a "BUY" recommendation, and OCBC holding a "HOLD" stance due to execution risks from its acquisition of Wing Hang Bank.

Main Points

• DBS:

  • Strongest performance in 1Q14 with a 66.5% QoQ increase in pre-tax profit (PBT) to SGD453m, accounting for 35.6% of group PBT.
  • Strongest NIM increase (5bps) and robust fee income growth.
  • Best positioned for a rising interest rate environment.
  • Expected to deliver the strongest EPS growth over FY14E–16E at 15.9%.

• OCBC:

  • Second in performance, with a strong earnings beat.
  • Expected to have the second-strongest EPS CAGR at 13.9%.
  • Caution is advised due to potential execution risks from the Wing Hang Bank acquisition.

• UOB:

  • Third in performance, with earnings mainly driven by lower taxes.
  • Least liquid with a high SGD LDR of 95%.
  • Expected to see a slight decline in NIM in 2Q14.

Key Information

• Greater China Impact:

  • Provided a significant earnings boost to DBS and OCBC through increased NIM and fee income.
  • UOB was less affected due to lower exposure.

• Valuation Adjustments:

  • TPs were raised in line with improved earnings forecasts.
  • DBS and UOB were valued using P/E multiples above the sector average.
  • OCBC's TP was based on a lower P/BV multiple due to execution risks.

• Risk Factors:

  • DBS: Unexpected departure of key personnel.
  • UOB: Political turmoil in Thailand affecting operations.
  • OCBC: Failure to extract operational synergies from Wing Hang Bank and prolonged capital market depression.

Summary Table

Investment Thesis

• DBS:

  • Strong operational improvements and a strong position to benefit from rising interest rates.
  • Positive transformational changes since CEO Piyush Gupta took over.

• UOB:

  • Disciplined management and strong focus on liquidity.
  • Largest exposure to ASEAN markets outside Singapore.

• OCBC:

  • More volatile earnings due to its stake in Great Eastern Holdings.
  • Execution risk related to the Wing Hang Bank acquisition.

Conclusion

The analyst maintains an Overweight stance on the Singapore banks sector, with DBS as the top pick and UOB as the second. OCBC is advised to be cautious due to execution risks and a more volatile earnings profile. The sector is expected to benefit from a rising interest rate environment and improved asset quality, with DBS leading in operational performance and growth potential.