3Q15: Momentum slowing, trends largely within expectations
Despite a tough operating environment, the SG banks reported a relatively steady set, with a 3% QoQ drop in core earnings. Many of the trends seen in 3Q15 were within expectations, and loan growth will likely remain a major near-term challenge for sector, offset by margin stabilization and still relatively comfortable asset quality trends. We expect that DBS will continue to look more defensive versus OCBC and UOB, as DBS remains our top pick.
Five key trends to look out for in the sector
After 3Q15, we see five key trends:
(1) loan momentum should stay weak, offset by
(2) NIM holding up for the rest of the year;
(3) we expect steady recovery in fee income in the medium term, particularly sustaining in WM growth;
(4) the credit cycle is starting to normalize, with regional markets more vulnerable; and
(5) the capital base looks healthy and sufficient.
For the rest of 2015, there could be positive surprises in NIM (if SIBOR moves up), offset by further weakening in loan growth (e.g., currency effect, seasonal). Within SG bankso commodity/oil & gas disclosures, UOB has the lowest exposure, while OCBC had some problematic exposures that it re-structured during the quarter.
3Q15 results review:
DBS most resilient, UOB and OCBC trailed behind 3Q15 review showed
(1) stable NIM,
(2) softer fee income, and
(3) a general pickup in bad debt provisions, with banks showing no systemic asset quality deterioration.
DBS reported a more resilient set, helped by NII/margin improvement, better loan and deposit growth, and stable asset quality. OCBC experienced a tougher quarter, affected by non-interest income weakness (GE MTM, fees) and signs of credit cost normalization, and higher NPLs as it proactively re-structured more problematic commodity exposures. UOB recorded a more stable quarter in asset quality, as bad debt provisions were largely coming from GP (as opposed to SP), along with modest recovery in fee income.
DBS remains our top pick - offers more upside catalysts than its peers; risks
The sector's shares have fallen 19% (underperformed STI by 3%) during 3Q15 given rising concerns over asset quality (e.g., property, oil-related exposure, Rmb devaluation) and lack of positive re-rating catalysts. Given weaker fee income outlook and normalization in asset quality, we have cut our earnings by 1-5% in FY15-FY17E. As loan growth weakness is likely to persist, we have cut our target prices by 4-6% across the sector as we lowered our long-term growth assumptions. We value the SG banks using a GGM.
Key downside risks: severe property price declines; asset quality deterioration.
Upside risk for UOB: stabilization in asset quality in its ASEAN markets. (Read Report)
Read Related Report
1) Singapore Banks - Weak investment markets, rising credit costs by CIMB Research, published on 2 November 2015
Source : Deutsche Bank Markets Research