■ Forecasts cut, but SG banks remain the safest place within ASEAN banks
■ Stocks hit by a weaker earnings outlook and macro developments
■ Earnings risks are largely priced in. Reiterate Buys on DBS and UOB
Still the safest place. UOB is our preferred Buy.
We still believe that SG banks have the best risk profile among ASEAN banks. Domestic asset quality risks are contained, while banks have strong buffers from provisioning reserves and capital positions. After the recent sell-off, stocks are more attractive notwithstanding a softer earnings outlook. UOB is now our preferred stock, but it does have a higher risk profile relative to DBS due to its exposure to Malaysia where macro risks are rising.
Downside risk is capped. Buy DBS and UOB.
Given soft macro conditions and loan growth trends, we cut our 2016-17 forecasts by 11-16% to reflect slower credit growth, less aggressive NIM expansion, and higher credit costs for UOB’s and OCBC’s operations in Malaysia. We now expect the sector to see a 3% earnings contraction in 2016e. That said, this soft outlook is largely reflected in stocks, with the sector trading at 1x 2016e BV and 10x 2016e earnings – c.1SD below average valuation multiples. There is value but investors must be patient. A re-rating catalyst could unfold through a US rate hike or sustained asset quality resilience. Following the forecast adjustments, we cut our target prices for the SG banks to reflect lower sustainable ROE assumptions and the rolling over of our BV estimates.
OCBC will report its results on 28 October followed by UOB on 30 October and DBS on 2 November. This should be a muted quarter with loan growth slowing further, NIM stabilizing and non-interest income taking a hit from weak market conditions. QoQ net profit should be flat or down marginally for OCBC and DBS. UOB, on the other hand, could see a14% QoQ net profit rebound due to exceptionally weak non-interest income in 2Q15. (Read Report)
Read Related Report
1) Singapore Banks - 3Q15 preview: a softer quarter by Deutsche Bank Markets Research, published on 22 October 2015
Source : HSBC Global Research