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Singapore Banks Summary

Core Content

This report provides an analysis of the performance and outlook for Singapore banks in 2013 and 2014, highlighting key trends and valuation metrics. The banks under review are DBS, UOB, and OCBC. The overall outlook for the sector is Overweight, with DBS being the top pick, and OCBC remaining a cautious investment due to ongoing uncertainties.

Main Trends and Key Information

1. Earnings Performance in 4Q13

• Mixed bottom lines, but encouraging trends were observed.
• DBS was disappointed with higher-than-expected trading income and overhead expenses.
• UOB surprised on the upside due to low taxation.
• OCBC surpassed expectations with strong cost management and lower-than-expected specific allowances.

2. Net Interest Margin (NIM)

• NIM increased sequentially for all three banks, led by UOB (+3bps).
• Industry NIM in 4Q13 was 30bps below the 10-year average of 1.97%.
• NIM is expected to remain stable in 2014, with a conservative contraction of 5bps.
• Sector NIM may rebound in 2015 as SGD SIBOR rises.
• Projected SGD SIBOR: 1.0% by end-2015, 2.0% by end-2016 (currently 0.4%).

3. Credit Quality

• Credit quality remained benign, with no signs of asset quality stress.
• OCBC's NPAs fell 2.5% QoQ to SGD1.3b in 4Q13 after a significant increase in the previous quarter.
• Banks expect credit quality to stay resilient in 2014.

4. Loan Growth

• Loan growth in 2013 was stronger than expected, averaging 18% YoY.
• 4Q13 loan growth was strong at 3.6% QoQ.
• Trade loans were the main driver of growth, accounting for 26.5% of total aggregated loans.
• Housing loans are expected to decelerate.

5. Liquidity Profile

• Ample SGD liquidity was maintained across all banks.
• DBS had the lowest SGD LDR at 75%, while UOB had the highest at 95%.
• USD LDR improved to 102.3% in 4Q13, down from 117.7% in 2012.
• Significant USD deposit growth (55.1% YoY) helped reduce USD LDR.
• USD39b commercial papers ensure financial flexibility in case of liquidity crunches.

Investment Outlook

Sector Valuation

• Singapore banks are attractive at one standard deviation below historical averages in terms of P/E and P/BV.
• The sector is expected to trade up to historical averages in the coming years.

Bank-Specific Recommendations

• DBS:

  • Recommendation: Buy
  • Target Price: SGD19.60
  • Upside: 18.9%
  • Investment Thesis: Beneficiary of rising interest rates, strong deposit franchise, and strategic presence in Greater China.
  • Risks: Unexpected departure of key personnel.
  • Catalysts: Consistent earnings and interest rate increases.

• UOB:

  • Recommendation: Buy
  • Target Price: SGD23.60
  • Upside: 18.6%
  • Investment Thesis: Disciplined management, largest exposure to ASEAN markets, strong liquidity management.
  • Risks: Thailand operations affected by political turmoil.
  • Catalysts: Sharp rise in interest rates.

• OCBC:

  • Recommendation: Hold
  • Target Price: SGD9.08
  • Upside: -3.2%
  • Investment Thesis: New CEO Samuel Tsien may take time to gain market trust, potential bid for Wing Hang Bank could affect investor interest.
  • Risks: Paying up for Wing Hang Bank, prolonged capital market depression.
  • Catalysts: Strong capital market recovery and interest rate increases.

Key Financial Metrics

P/E and P/BV Bands

• Sector average is at one standard deviation below historical averages.
• DBS and UOB are below the sector average in P/E and P/BV, indicating attractive valuations.

Liquidity and Funding

• DBS has the most liquid SGD balance sheet.
• OCBC has a higher proportion of USD deposits.

Profitability and Efficiency

• DBS and UOB have lower cost/income ratios.
• OCBC has a more volatile earnings profile due to its stake in Great Eastern Holdings.

Asset Quality

• Gross NPLs for all banks were relatively low, with OCBC showing the most improvement.
• Provision coverage was strong across the board, indicating good asset management.

Conclusion

Singapore banks showed resilience in credit quality and strong liquidity, with DBS and UOB outperforming in terms of NIM and loan growth. The sector is valued attractively, and the investment outlook is positive with DBS as the top pick. However, OCBC remains cautious due to uncertainties surrounding its proposed acquisition and leadership changes. The market is expected to react positively in the second half of 2014 with interest rate increases and improved economic conditions.