Singapore Banks - 3Q15 results preview: judgment day


Reporting dates for upcoming results, OCBC: 28 October, UOB: 30 October, DBS: 2 November

■ We expect weak QoQ loan growth, further QoQ improvements in NIMs, and some asset-quality deterioration

■ 3Q15 results should provide some clarity on asset quality outlook. Maintain Positive rating for sector; DBS remains our top pick.

What’s new:
The Singapore banks are scheduled to report their 3Q15 results from 28 October. Here we present our 3Q15 forecasts for each one. In our view, management commentary should provide better clarity on the outlook for NPLs and credit costs, and might even be a positive catalyst for share prices if end-3Q15 asset quality remains benign.

What’s the impact:
We expect marginally stronger loan growth of about 1% QoQ for all banks, and QoQ improvements in their net-interest margins (NIMs). The SIBOR and SOR rates were at elevated levels in 3Q15 (and this situation should be conducive for bank NIMs), corresponding to expectations for a Fed rate hike and a weak outlook for the Singapore dollar, though these expectations have faded sharply since early October.

We believe the area that will be scrutinised closely is the trend of asset quality (NPL ratios, credit costs [provisions], and provision coverage) for their industry exposure to commodities-related companies and geographic exposure to ASEAN and China. Up to 2H15, NPL ratios were near record lows. We believe these credit exposures are likely to deteriorate, but the severity (in quantifiable terms) is still highly uncertain. For most banks, we expect a QoQ uptick in the NPL ratios and a bigger QoQ increase in their credit costs for 3Q15.

These expectations are already incorporated in our 29 September 2015 initiation report on the sector: Net-interest income growth at low prices. We believe the asset quality reported for 3Q15 and management commentary will provide better clarity on the outlook for NPLs and credit costs.

What we recommend:
We maintain our Positive rating for the sector as we believe the multiyear process of global interest-rate normalisation remains intact and this trend will underpin NIM and net-interest income growth. Our ratings in order of preference are DBS Group (DBS SP, SGD18.00, Buy [1]), Oversea-Chinese Banking Corporation (OCBC SP, SGD9.47, Buy [1]), and United Overseas Bank (UOB SP, SGD20.40, Outperform [2]).

Risks to our positive sector rating include a worse-than-expected deterioration of loan exposures in ASEAN and China, a protracted decline in SIBOR and SOR rates, and a severe economic downturn in Singapore and the Asia region.

How we differ:
Our annual total credit cost assumptions of 25-40bps for 2015-17 could possibly be lower than consensus, while our SIBOR forecast of 1.4% for 2016 and 1.9% for 2017 could be higher than consensus. (Read Report)

Source : Daiwa Capital Markets

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