We expect 15-19% negative revisions for 2016 on the back of higher credit costs (53bps, 2.6% peak NPL by 2017), slower fee income growth and a limited NIM pickup (+5bps y/y). Further, corporate actions including divestments, capital calls and M&A will determine re-/de-rating. As we factor these in, we downgrade DBS and OCBC to Neutral from OW, while maintaining an UW rating on UOB.
■ We forecast that UOB NPLs will peak at 3.5%, OCBC at 2.4% and DBS at 1.9% by 2017, based on our 10Y NPL history and PD/LGD analysis. Banks are managing asset quality risks by ring-fencing collaterals/cash flows, restructuring tenure/rates/covenants, seeking “preferential exits” and, where possible, foreclosing. Game theory suggests a sharper pickup in NPLs if even a small number of banks start active foreclosures.
■ NII growth will be a function of NIM, rather than volumes. The gap between S$ CASA and S$ LDR favors DBS (+9ppt), is broadly neutral for OCBC (-20ppt) and is negative for UOB (-35ppt). Deposit spreads were negative 45bps in 2007-15, leading banks to grow non-S$ loans (14% 7Y CAGR, 58% of book vs. 51% in 2007). Both these trends are now reversing.
■ CET1 ratios are at risk of 40-90bps deterioration if 10% of loans migrate to the higher-risk bucket. Also, 13% of Singapore banks’ RWAs comprise market risk (vs. 4% for Asia), which opens up CET1 to volatility. OCBC has a low starting point at 11.4% CET1, but 205bps of unrealized property gains allow a degree of leeway.
■ NPL formation, 4% 2015-17E loan CAGR (vs. 13% in 2007-15) and threats from FinTech startups have shifted the focus to technology-based solutions. But beyond a point, slow balance sheet growth should result in the evaluation of inorganic options, more so as asset prices come off. We see OCBC as least at risk in this regard, followed by UOB and DBS.
■ DBS and OCBC are ahead in the shift toward digitalization, with UOB playing catch-up. DBS’s intentions of branch-light growth in newer markets (India, in particular) appear more ambitious than the rest. It will be a game changer if they are able to get there over the next few quarters. Otherwise, we do not deny the possibility of acquisition-led growth in Asia, particularly in Indonesia and the Philippines. (Read Report)
Source : JP Morgan Asia Pacific Equity Research