FIG Singapore Banks
Singapore Banks
Forecasts cut, but SG banks remain the safest place within ASEAN banks
Still the safest place in the ASEAN banks space
Stocks hit by a weaker earnings outlook and macro developments Earnings risks are largely priced in. Reiterate Buys on DBS and UOB
Changes to our target prices and EPS estimates Company DBS UOB OCBC
Stock Rating code DBS SP UOB SP OCBC SP
__ TP (SGD) ___ __ EPS est change ___ Old New 2015e 2016e 2017e
Buy Buy Hold
23.60 26.95 11.30
20.00 26.10 10.20
-1% -4% -2%
-13% -16% -11%
-11% -15% -13%
Source: HSBC estimates
SG Banks: HSBC versus consensus Core net profit SGDm
_________2016e _________ _________ 2017e _________ HSBC Cons Diff HSBC Cons Diff
DBS UOB OCBC
4,411 3,231 3,602
4,615 3,383 4,096
-4% -4% -12%
4,733 3,622 3,738
5,224 3,626 4,470
-9% 0% -16%
Source: HSBC, Bloomberg
22 October 2015 Kar Weng LOO* Analyst The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch +65 6658 0621
[email protected] Ashish Khare* Associate Bangalore View HSBC Global Research at: http://www.research.hsbc.com *Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations Issuer of report: The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch
MICA (P) 073/06/2015 MICA (P) 136/02/2015 MICA (P) 041/01/2015
Disclaimer & Disclosures This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it
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. 3Q15 preview. 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.
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FIG Singapore Banks 22 October 2015
ASEAN valuation table Bank
Rating 21-Oct Target price price
___ PB (x) 15e 16e
_ RoE (%) 15e 16e
3.5 3.9 3.6 3.7
3.5 3.7 3.5 3.6
1.1 1.2 1.1 1.1
1.0 1.1 1.0 1.0
12.0 12.1 11.7 11.9
10.6 10.3 10.6 10.7
10 10 10 10
10 11 10 10
7.4 8.0 7.0 7.5
6.9 7.7 6.5 7.0
32.1 27.6 23.1
72.5 43.1 48.3
Indonesia BMRI BMRI IJ Hold 9,225 9,200 BBRI BBRI IJ Reduce 10,550 8,900 BBCA BBCA IJ Hold 13,325 14,050 BDMN BDMN IJ Reduce 3,075 2,460 BBNI BBNI IJ NR 5,225 NA BBTN BBTN IJ NR 1,160 NA BTPN BTPN IJ NR 2,900 NA Avg Avg ex-BBCA Sector avg ex-BBNI, BBTN & BTPN
1.3 2.6 1.4 3.5 2.6 2.3 2.8 1.6 1.7 1.4
1.3 2.9 1.7 3.8 2.8 3.0 2.5 1.8 1.8 1.6
1.8 2.3 3.6 0.8 1.5 0.9 1.2 2.1 1.8 2.3
1.6 2.0 3.0 0.8 1.3 0.8 1.1 1.9 1.6 2.0
16.6 21.4 21.2 8.6 14.9 12.1 16.0 17.7 16.8 18.5
14.7 20.6 22.8 9.0 16.6 13.2 16.0 17.7 16.4 18.1
12 12 18 10 10 8 8 13 11 13
12 10 14 9 8 6 7 11 10 12
6.6 7.4 12.0 3.3 NA NA NA 8.0 6.6 8.0
6.2 6.9 10.5 3.2 NA NA NA 7.4 6.2 7.4
15.7 19.0 23.9 2.1 7.1 0.9 1.2
19.2 25.2 14.8 0.6 13.7 1.7 0.0
Thailand BBL KBANK KTB SCB BAY TCAP Sector avg
Singapore DBS OCBC UOB Sector avg
Malaysia MAY CIMB PBK HLBK RHBC AMM AHB AFG Sector avg Sector avg (ex-PBK) Philippines BDO BPI MBT UBP SECB Sector avg
DBS SP OCBC SP UOB SP
Buy Hold Buy
17.90 9.36 20.10
20.00 10.20 26.10
BBL TB KBANK TB KTB TB SCB TB BAY TB TCAP TB
Hold 169.50 170.00 Reduce 185.00 173.50 Reduce 17.60 15.60 Reduce 143.00 128.00 Reduce 36.25 29.80 Hold 32.75 30.50
3.8 2.2 4.0 3.1 2.2 3.7 3.0
3.8 2.4 4.3 3.5 2.8 3.7 3.3
0.9 1.6 1.0 1.5 1.3 0.8 1.3
0.9 1.4 0.9 1.4 1.3 0.7 1.2
13.7 11.0 14.4 9.0 8.2 11.7 11.9
9.8 11.9 9.2 11.6 16.8 9.6 11.4
10 12 9 12 17 10 11
9 10 9 10 14 10 10
6.2 5.9 4.2 5.7 5.8 2.3 5.4
6.0 5.4 4.4 6.0 5.4 2.6 5.4
9.1 12.4 6.9 13.6 7.5 1.1
26.6 39.8 23.5 29.2 5.7 2.3
MAY MK CIMB MK PBK MK HLBK MK RHBC MK AMM MK AHB MK AFG MK
Reduce Buy Reduce Hold Reduce Reduce NR NR
7.90 5.90 15.75 13.15 5.10 3.50 NA NA
5.8 3.4 3.2 1.9 2.4 4.0 4.1 4.6 4.0 4.1
5.9 4.2 3.4 2.8 2.2 3.9 5.4 5.0 4.4 4.5
1.5 1.0 2.4 1.4 0.8 1.0 0.6 1.2 1.3 1.2
1.4 1.0 2.2 1.3 0.7 0.9 0.6 1.1 1.2 1.1
11.8 9.4 15.8 12.7 8.5 10.0 5.6 11.7 11.2 10.4
11.4 10.6 15.5 11.3 7.4 9.3 7.1 11.7 11.1 10.3
13 10 16 12 10 10 10 10 12 12
13 9 15 12 10 10 8 10 12 11
8.5 6.4 11.0 12.1 6.2 7.1 NA NA 8.9 8.1
8.3 6.2 10.5 11.9 6.3 7.1 NA NA 8.9 7.8
19.2 9.8 16.8 6.0 3.7 3.4 1.1 1.3
22.7 11.5 24.5 2.6 1.3 6.0 0.2 1.3
Hold 102.80 106.25 Buy 82.95 125.35 Buy 82.50 116.30 Hold 57.00 60.20 Hold 143.90 151.35
2.0 2.2 1.2 3.9 1.4 1.9
2.0 2.2 1.2 3.9 1.7 2.0
1.9 2.0 1.3 1.0 1.6 1.7
1.7 1.8 1.2 1.0 1.5 1.5
12.7 14.0 10.5 10.2 14.7 12.3
13.5 14.8 11.0 10.3 13.6 12.8
16 15 14 10 12 15
13 13 11 10 11 12
10.6 10.5 8.7 7.3 9.6 9.8
8.9 8.9 7.0 6.7 8.9 8.3
8.1 7.0 5.7 1.3 1.9
6.9 3.9 9.4 0.6 3.9
BDO PM BPI PM MBT PM UBP PM SECB PM
8.62 4.97 18.64 14.24 6.20 4.90 2.40 3.63
NR: Valuations for Non-Rated stocks are based on Bloomberg consensus estimates Source: Bloomberg; HSBC
2
__ PE (x) 15e 16e
Avg _ P/PPoP (x) Mkt cap trdg 15e 16e USDbn value USDm
Div yield (%) 15e 16e
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FIG Singapore Banks 22 October 2015
Hit by macro developments and a weaker outlook Weaker stock prices A lot has changed since we last wrote on the sector on 16 July 2015. Stock prices have literally tanked in the last 2-3 months to the point where the YTD performance of Singapore bank stocks in USD terms is no different from Indonesian banks despite significantly lower NPL risks. The sector is now down 18% YTD in USD terms, underperforming banks in APAC (ex-Japan), which was down by only 14% YTD. The sell-off started on 27 July 2015, in the midst of the 2Q15 reporting season for the Singaporean banks. Selling momentum snowballed following the renminbi fixing regime adjustment on 11 August 2015. Fig 1: APAC bank sector performance in USD terms (YTD %) 0 % -5 -6
-7
-10
-9
-10
-10 -12
-15
-14
-15 -18
-20
-19
-19 -22
-25 TW
KR
IN
PH
HK
CH
AP X J
PK
SG
AU
ID
MY
-24 TH
Source: Thomson Reuters Datastream, HSBC; Priced as at 16 October 2015
Fig 2: SG banks performance in SGD terms (YTD %) 0% -2%
Fig 3: SG banks: YTD stock performance % 10% 5%
-4%
-12% -14%
-13%
-16%
1-Oct-15
1-Sep-15
1-Aug-15
1-Jul-15
1-Jun-15
1-May-15
1-Apr-15
1-Mar-15
-10% -10%
-11%
1-Feb-15
-5%
-8% -10%
1-Jan-15
0%
-6%
-15% -20% -25%
-18% -18%
-20% OCBC
DBS
UOB
Source: Bloomberg, HSBC; Priced as at 21 October 2015
FSSTI
-30%
DBS
UOB
OCBC
Source: Bloomberg, HSBC; Priced up to 16 October 2015
3
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FIG Singapore Banks 22 October 2015
As concerns mount Readers may be forgiven for thinking that the stock price weakness seen since July 2015 was the product of poor 2Q15 results given the timing of the sell-off. To be clear, operating trends were fairly robust during 2Q15. Rather, the sell-off was caused by more muted management guidance on NIM and loan growth. This was amplified by weak macro data-points and developments right after the 2Q15 results season. System loan growth continues to slow with SGD loans growing at only 4% y-o-y in August 2015 (Fig 4). Given the slow pace of economic growth, the risk is that this moderating loan growth trend will continue into 2016. The good news is that slowing loan growth in a weak economic environment should help cap credit risks as the cycle turns. The bad news is that this could adversely affect earnings. Conventional wisdom suggests that Singapore bank earnings are not particularly sensitive to loan growth alone. In reality, when loan growth slows, a lot of other earning drivers are affected. If the loan deposit ratios fall, there is downward pressure on NIM. This has yet to happen as deposit growth still lags loan growth. As credit momentum slows, there could also be upward pressure on credit costs. All these drivers are affected at the same time, thereby making the bottom-line impact on earnings much more difficult to predict.
Source: MAS, HSBC
Mar-15
Mar-14
Mar-13
Mar-12
Mar-11
Mar-10
Mar-09
Mar-08
Mar-04
Mar-15
-5%
Mar-14
60%
Mar-13
0%
Mar-12
65%
Mar-11
5%
Mar-10
70%
Mar-09
10%
Mar-08
75%
Mar-07
15%
Mar-06
80%
Mar-05
20%
Mar-07
SGD deposits YoY%
Mar-06
SGD loans YoY%
25%
Fig 5: SG bank system: SGD loan deposit ratio % 90% August 2015: 86% 85%
Mar-05
Fig 4: SG bank system: SGD loans vs. SGD deposits (YoY%) 30%
Source: MAS, HSBC
Despite these headwinds, short-end SGD rates have been rising (Fig 6). This is positive for NIM as loan and securities portfolios reprice upwards. On our estimates, the Singapore banks are still maintaining a net asset duration of c.3 years on their securities portfolio. DBS has also stated explicitly that it will manage its liabilities to diffuse margin pressure. While higher short-end SGD rates are generally a positive for margins, markets have been concerned on the potential negative impact on credit costs as rates rise. We have taken the view that the credit quality of the Singapore loan portfolio will remain resilient as long as employment conditions remain stable and interest rate rises are moderate and spaced out. However, we now expect higher credit costs for UOB and OCBC to reflect a weaker macro environment in Malaysia. Both these banks have 10-15% of their assets coming from Malaysia.
4
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FIG Singapore Banks 22 October 2015
Fig 6: 3-month SGD SIBOR vs. 3-month SOR %
Fig 7: 3-month SIBOR vs. SGD bond yields %
1.5
5
%
1.3
3-mth SGD SIBOR 3-mth SGD SOR
4
1.1
3
0.9
2
0.7
1
0.5
Source: Bloomberg, HSBC
10-yr S$ bond yield
May-14
May-12
May-10
May-08
May-06
May-02 Oct-15
Sep-15
Jul-15
Aug-15
Jun-15
Apr-15
May-15
Mar-15
Jan-15
Feb-15
Dec-14
Nov-14
Oct-14
Sep-14
0.1
May-04
0
0.3
2-yr S$ bond yield
3 mth Sibor Source: Bloomberg, HSBC
Earnings may be weaker but the balance sheet is still safe Given the headwinds, we are toning down our loan growth expectations across the board for 2015e-17e. Although we continue to expect NIM improvement in 2016, we now expect the degree of improvement to be more muted than before as banks deal with the challenge of liquidity deployment in a moderating loan growth environment. While all this sounds pretty sombre, the good news is that asset quality seems to be holding up extremely well with little evidence of undue stress. There are pockets of weakness here and there especially from the SME loan portfolios but this has been well anticipated and is being managed accordingly. Furthermore, unlike banks in Malaysia or Indonesia, Singaporean banks have seen their loan loss coverage levels trend higher in the past half a decade (Fig 8). That is not to say that we anticipate NPL improvement going forward. We believe that the NPL upcycle will be a muted affair for the Singapore banks (Fig 9). Credit cost will still trend up. In fact, we are now baking in higher credit costs for UOB and OCBC given a poorer macro outlook for Malaysia, which is one of their key markets. Fig 8: SG banks: Loan loss coverage trend % DBS
180%
UOB
Fig 9: SG banks: Gross NPL ratio % OCBC
DBS
4.0%
OCBC
UOB
3.5%
160%
3.0%
140%
2.5%
120%
2.0%
100%
1.5%
80%
1.0%
FY17E
FY16E
FY15E
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
2Q15
2Q14
2Q13
2Q12
2Q11
2Q10
2Q09
2Q08
2Q07
Source: Companies, HSBC
FY06
0.5%
60%
Source: Companies, HSBC
5
abc
FIG Singapore Banks 22 October 2015
2016-17e earnings forecasts cut 11-16% After adjusting our numbers to reflect slower loan growth, less aggressive NIM expansion and higher credit costs for UOB and OCBC, we lower our 2016-17e earnings forecasts for the sector by 11-16% (Fig 10). Details of the changes to our assumptions are highlighted in Fig 12-14. We now anticipate earnings to contract 3% in 2016e, as rising credit costs could outweigh the impact of rising NIM. Previously, we were expecting 10% earnings growth in 2016e as we expected the positive impact on NIM from higher domestic rates to outweigh higher credit costs. Fig 10: SG banks: Changes to core net profit forecasts Core net profit (SGD) DBS UOB OCBC Total
_____________ 2015E ______________ _____________ 2016E _____________ Previous Current % chg Previous Current % chg
_____________2017E _____________ Previous Current % chg
4,485
4,462
-1%
5,045
4,411
-13%
5,328
4,733
-11%
3,457 3,867 11,809
3,324 3,807 11,592
-4% -2% -2%
3,862 4,026 12,932
3,231 3,602 11,244
-16% -11% -13%
4,271 4,304 13,903
3,622 3,738 12,092
-15% -13% -13%
Source: HSBC
Following the changes to our assumptions, our earnings forecasts for DBS and OCBC are now 5-15% below consensus estimates for 2016-17e. We believe the key reason why our numbers are lower for DBS is because of more muted NIM expectations. As for OCBC, we think the market may be too optimistic on its ability to extract synergies from OCBC Wing Hang Bank. Fig 11: SG banks: HSBC vs. Consensus earnings forecasts Core net profit SGDm DBS UOB OCBC
_____________ 2015E ______________ _____________ 2016E _____________ HSBC Cons Diff HSBC Cons Diff
_____________2017E _____________ HSBC Cons Diff
4,598
4,315
7%
4,411
4,615
-4%
4,733
5,224
-9%
3,324 3,807
3,196 3,820
4% 0%
3,231 3,602
3,383 4,096
-4% -12%
3,622 3,738
3,626 4,470
0% -16%
Source: Bloomberg, HSBC
Fig 12: SG banks sector: Core EPS growth % 25%
23%
20%
16%
15% 11% 10%
7%
5%
7%
1%
1% 0% -5% 2010
2011
2012
2013
2014
2015E
Source: Companies, HSBC; Sector EPS calculated using aggregated core earnings divided by aggregated share base of DBS, UOB and OCBC
6
-3% 2016E
2017E
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FIG Singapore Banks 22 October 2015
Fig 13: DBS: Changes to earnings forecasts FY Dec (SGDmn)
__________ 2015E _________ __________ 2016E _________ _________ 2017E ________ Previous Current % chg Previous Current % chg Previous Current % chg
Interest income Interest expense Net int inc Non-int inc Operating inc Operating costs PPoP Loan loss provision Associates & amortization Pre-tax profit Tax Minorities & pref. div Net profit Core earnings Core EPS (SGD)
10,338 (3,086) 7,252 3,956 11,208 (4,850) 6,359 (988) 80 5,451 (818) (148) 4,485 4,485 1.81
9,704 (2,665) 7,040 3,728 10,768 (4,798) 5,970 (603) 80 5,447 (837) (148) 4,462 4,462 1.80
Key financial ratios Gross NPL Loan Loss Coverage Net provisions / Avg net loans Net loans / Deposits Gross loan growth Deposit growth Assets / Equity (x) Fully loaded Core Tier I RWCAR Core ROE Core ROA Non-int inc / Total inc Cost income ratio Effective tax rate Yield on earning assets Cost of funds Net interest margin
1.20% 122% 0.35% 82% 5% 5% 12.2x 11.8% 15.4% 11.7% 0.97% 35% 43% 15% 2.43% 0.79% 1.70%
1.00% 135% 0.22% 92% 4% -8% 11.0x 13.0% 17.0% 11.6% 1.01% 35% 45% 15% 2.40% 0.73% 1.74%
-6% -14% -3% -6% -4% -1% -6% -39% 0% 0% 2% 0% -1% -1% -1%
11,709 10,179 (3,543) (2,782) 8,167 7,396 4,595 4,334 12,762 11,730 (5,383) (5,277) 7,379 6,453 (1,350) (1,169) 80 80 6,109 5,364 (916) (805) (148) (148) 5,045 4,411 5,045 4,411 2.03 1.78 1.40% 122% 0.45% 81% 8% 8% 12.0x 12.0% 15.4% 12.1% 1.00% 36% 42% 15% 2.52% 0.83% 1.76%
1.20% 133% 0.40% 92% 5% 5% 10.8x 13.4% 17.2% 10.6% 0.98% 37% 45% 15% 2.45% 0.75% 1.78%
-13% -21% -9% -6% -8% -2% -13% -13% 0% -12% -12% 0% -13% -13% -13%
12,599 (3,808) 8,791 5,055 13,846 (5,868) 7,978 (1,616) 80 6,442 (966) (148) 5,328 5,328 2.15
10,683 (2,916) 7,767 4,767 12,534 (5,647) 6,887 (1,225) 80 5,743 (861) (148) 4,733 4,733 1.91
1.50% 132% 0.50% 81% 8% 8% 12.0x 12.4% 14.3% 11.8% 0.99% 37% 42% 15% 2.52% 0.83% 1.76%
1.20% 152% 0.40% 92% 5% 5% 10.6x 14.0% 16.2% 10.6% 1.00% 38% 45% 15% 2.45% 0.75% 1.78%
-15% -23% -12% -6% -9% -4% -14% -24% 0% -11% -11% 0% -11% -11% -11%
Source: HSBC
7
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FIG Singapore Banks 22 October 2015
Fig 14: UOB: Changes to earnings forecasts FY Dec (SGDmn)
__________ 2015E__________ __________ 2016E __________ __________ 2017E _________ Previous Current % chg Previous Current % chg Previous Current % chg
Interest income Interest expense Net int inc Non-int inc Operating inc Operating costs PPoP Loan loss provision Associates & amortization Exceptionals Pre-tax profit Tax Minorities & pref. div Net profit Core earnings Core EPS (SGD)
8,258 (3,074) 5,184 3,032 8,215 (3,303) 4,912 (814) 116 4,214 (632) (125) 3,457 3,457 2.14
7,989 (2,940) 5,049 3,032 8,081 (3,461) 4,620 (680) 116 4,057 (609) (124) 3,324 3,324 2.06
Key financial ratios Gross NPL Loan Loss Coverage Net provisions / Avg net loans Net loans / Deposits Gross loan growth Deposit growth Assets / Equity (x) Fully loaded Core Tier I CAR Core ROE Core ROA Non-int inc / Total inc Cost income ratio Effective tax rate Yield on earning assets Cost of funds Net interest margin
1.25% 150% 0.40% 84% 8% 8% 11.1x 13.3% 17.2% 12.1% 1.12% 37% 40% 15% 2.75% 1.11% 1.72%
1.25% 148% 0.34% 83% 6% 7% 11.1x 13.0% 17.3% 11.7% 1.08% 38% 43% 15% 2.67% 1.07% 1.69%
Source: HSBC
8
-3% -4% -3% 0% -2% 5% -6% -17% 0% NM -4% -4% -1% -4% -4% -4%
9,215 (3,395) 5,820 3,376 9,195 (3,634) 5,562 (988) 118 4,692 (704) (127) 3,862 3,862 2.39
8,714 (3,287) 5,427 3,376 8,802 (3,807) 4,996 (1,167) 118 3,947 (592) (124) 3,231 3,231 2.00
1.30% 159% 0.45% 84% 8% 8% 10.9x 13.6% 17.3% 12.5% 1.16% 37% 40% 15% 2.85% 1.14% 1.80%
1.35% 162% 0.55% 82% 5% 6% 10.9x 13.4% 17.5% 10.6% 1.00% 38% 43% 15% 2.74% 1.13% 1.71%
-5% -3% -7% 0% -4% 5% -10% 18% 0% NM -16% -16% -2% -16% -16% -16%
9,917 (3,645) 6,272 3,655 9,927 (3,924) 6,003 (947) 121 5,177 (776) (129) 4,271 4,271 2.65
9,214 (3,470) 5,744 3,655 9,399 (4,111) 5,288 (1,000) 121 4,409 (661) (126) 3,622 3,622 2.24
1.25% 167% 0.40% 83% 8% 8% 11.0x 14.0% 17.4% 12.8% 1.20% 37% 40% 15% 2.85% 1.14% 1.80%
1.30% 177% 0.45% 81% 5% 6% 10.9x 13.8% 17.7% 11.2% 1.05% 39% 44% 15% 2.74% 1.13% 1.71%
-7% -5% -8% 0% -5% 5% -12% 6% 0% NM -15% -15% -3% -15% -15% -15%
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FIG Singapore Banks 22 October 2015
Fig 15: OCBC: Changes to earnings forecasts FY Dec (SGDmn)
_________ 2015E _________ __________ 2016E__________ _________ 2017E ________ Previous Current % chg Previous Current % chg Previous Current % chg
Interest income Interest expense Net int inc Non-int inc Operating inc Operating costs PPoP Loan loss provision Associates & amortization Exceptionals Pre-tax profit Tax Minorities & pref. div Net profit Core earnings Core EPS (SGD)
8,981 (3,453) 5,528 3,650 9,178 (3,747) 5,431 (531) 195 5,095 (866) (361) 3,867 3,867 0.95
8,620 (3,381) 5,239 3,326 8,565 (3,714) 4,850 (354) 296 136 4,928 (764) (357) 3,807 3,671 0.91
Key financial ratios Gross NPL Loan Loss Coverage Net provisions / Avg net loans Net loans / Deposits Gross loan growth Deposit growth Assets / Equity (x) Fully loaded core Tier I RWCAR Core ROE Core ROA Non-int inc / Total inc Cost income ratio Effective tax rate Yield on earning assets Cost of funds Net interest margin New shares from scrip dividend (mn) Yr-end share base ex-treasury shares (mn) Avg share base ex-treasury shares (mn)
0.80% 154% 0.25% 84% 5% 5% 12.7x 12.4% 16.3% 12.3% 0.97% 40% 41% 17% 2.73% 1.14% 1.68% 145 4,128 4,056
0.75% 158% 0.17% 83% 2% 4% 12.6x 12.4% 16.4% 11.7% 0.93% 39% 43% 16% 2.63% 1.12% 1.60% 142 4,126 4,055
-4% -2% -5% -9% -7% -1% -11% -33% 52% NM -3% -12% -1% -2% -5% -5%
9,573 (3,620) 5,953 4,024 9,977 (4,121) 5,856 (780) 222 5,298 (901) (371) 4,026 4,026 0.96
9,170 (3,582) 5,588 3,668 9,257 (4,086) 5,171 (751) 335 4,755 (808) (344) 3,602 3,602 0.86
0.90% 166% 0.35% 84% 5% 5% 12.0x 13.6% 17.3% 11.5% 0.95% 40% 41% 17% 2.76% 1.14% 1.72% 145 4,274 4,201
0.90% 164% 0.35% 81% 3% 5% 12.1x 13.5% 17.2% 10.3% 0.86% 40% 44% 17% 2.67% 1.14% 1.63% 135 4,261 4,193
-4% -1% -6% -9% -7% -1% -12% -4% 51% NM -10% -10% -7% -11% -11% -10%
10,198 (3,933) 6,264 4,225 10,490 (4,534) 5,956 (583) 231 5,603 (953) (347) 4,304 4,304 0.99
9,643 (3,809) 5,833 3,852 9,685 (4,494) 5,191 (662) 348 4,877 (829) (311) 3,738 3,738 0.86
0.90% 183% 0.25% 84% 5% 5% 11.4x 14.5% 17.9% 11.1% 0.96% 40% 43% 17% 2.79% 1.19% 1.71% 152 4,426 4,350
0.90% 189% 0.30% 79% 3% 5% 11.6x 14.2% 17.6% 9.8% 0.84% 40% 46% 17% 2.66% 1.16% 1.61% 135 4,396 4,328
-5% -3% -7% -9% -8% -1% -13% 13% 51% NM -13% -13% -10% -13% -13% -13%
Source: HSBC
9
abc
FIG Singapore Banks 22 October 2015
The value is there but you must be patient Following the recent stock price weakness, valuation multiples are now at much more appealing levels even if we take into consideration the downgrade in earnings forecasts. To put it into context, the sector’s one-year forward PBV multiple is hovering at 1x, which is close to crisis levels or one standard deviation below its historical mean of 1.3x. Even on a PE basis, the sector trades at 10x 2016e earnings. Again, close to one standard deviation below its historical mean of 13x. At these levels, downside risk to stock prices should be limited even under a situation where EPS growth is weak. To us, there is clearly value in the sector. What we need is a re-rating catalyst to drive stocks higher. At this stage, the revenue outlook appears fairly soft. Therefore, any positive surprises on this front should help drive stock prices higher. This could potentially manifest itself in the form of a US Fed funds rate hike. HSBC expects the US Federal Reserve to start hiking the Fed funds rate by 25bp by 4Q15. Another potential catalyst is if the resilience seen in asset quality sustains into 2016e. We believe that if this happens, it will be a big positive driver for stocks as the market is already pricing in a moderate NPL upcycle at this stage. Fig 16: SG banks: One-year forward PBV (x) 2.1
Fig 17: SG banks: One-year forward PE (x) 18 +1SD: 16x
1.9
16
+1SD: 1.6x
1.7
14
Avg: 1.3x
1.5
Avg: 13x
12
1.3
10
1.1 -1SD: 1.1x
8
0.7
-1SD: 9x
Source: Bloomberg, Companies, HSBC
Apr-15
Apr-14
Apr-13
Apr-12
Apr-11
Apr-10
Apr-09
Apr-08
Apr-07
Apr-06
Apr-05
Apr-03
Apr-00 Apr-01 Apr-02 Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15
6
Apr-04
0.9
Source: Bloomberg, Companies, HSBC
Fig 18: SG banks: Sector valuation table Bank
Rec
DBS Buy OCBC Hold UOB Buy Sector avg
Price Target price 17.90 9.36 20.10
20.00 10.20 26.10
__ PBVx ___ 15E
16E
15E
16E
15E
16E
15E
16E
_ PEx ___ 2014-16E Mkt Avg trdg core EPS cap value 15E 16E CAGR % USDb USDm
1.1 1.2 1.1 1.1
1.0 1.1 1.0 1.0
12.0 12.1 11.7 11.9
10.6 10.3 10.6 10.7
3.5 3.9 3.6 3.7
3.5 3.7 3.5 3.6
7.4 8.0 7.0 7.5
6.9 7.7 6.5 7.0
9.9 10.1 10.3 10.9 9.8 10.0 9.7 10.1
Source: Bloomberg, HSBC; Priced as at 21 October 2015
10
__ RoE% ___
Div yield %
_ P/PPoP x__
7 (4) 3
32 28 23
72 43 48
abc
FIG Singapore Banks 22 October 2015
Upside to UOB comes at a greater risk. Maintain Buy on DBS and UOB We cut our target prices for all the Singapore banks following the changes to our earnings forecasts. In this muted environment, ROE’s for the sector could remain low for longer. Hence, we have lowered our sustainable ROE assumptions for all the banks we cover. We have also taken the opportunity to roll forward our BV base to 2016e from 2015e for UOB and OCBC. Our valuation base for DBS is already anchored on 2016e BV. Key changes to the assumptions we use to calculate our target prices are highlighted in Fig 19. Fig 19: SG banks: Changes to target price assumptions ________ DBS _______ ________ UOB _______ ________ OCBC ______ Previous Current Previous Current Previous Current Cost of equity Sustainable RoE Long term growth Fair value PBV (x) Implied 2016e PE (x)
9.5% 12.0% 2% 1.3x 11.6x
9.5% 10.6% 2% 1.2x 11.2x
9.4% 12.3% 4% 1.5x 13.0x
9.4% 11.2% 4% 1.3x 12.7x
9.1% 11.1% 4% 1.4x 11.9x
9.1% 10.0% 4% 1.2x 10.9x
BV (SGD/sh) Gordon Growth derived fair value (SGD/sh)
17.50 23.60
17.33 20.00
17.68 26.95
19.72 26.10
8.05 11.30
8.57 10.20
Source: HSBC
Based on our new target prices, UOB has much more upside to its stock compared to DBS. However, this comes at a greater risk. The biggest risk to the balance sheets of Singapore banks stem from outside the country as evidenced from their experience during the 1998 Financial Asian Crisis. DBS’s key external exposure comes from Greater China with almost a quarter of its assets coming from that region. By contrast, UOB has a sizeable presence in Malaysia with 11% of its assets exposed there. We believe the macro risks are much greater in Malaysia than they are in Greater China. The other key reason why there may be less earnings risk to DBS is because management appears to be more willing to manage its liabilities and even live with a smaller balance sheet to protect NIM. In contrast, we get the sense that both OCBC and UOB are very much driven by the need to maintain their asset base and to shore up funding even during a period when loan growth is slowing. We fear that this will come at the cost of thinner margins for the latter two banks.
11
12
Fig 20: SG banks: 3Q15 earnings expectations __________________________ DBS _________________________ __________________________ UOB _________________________ __________________________OCBC ________________________ 3Q14 2Q15 3Q15 Q-o-Q % YoY % 3Q14 2Q15 3Q15 Q-o-Q % YoY % 3Q14 2Q15 3Q15 Q-o-Q % YoY % Interest income Interest expense Net interest income Non-interest income Operating income Operating costs Pre-provision profit Provisions Associates & Amortization Exceptionals Pre-tax profit Tax Minorities Net profit Core net profit Key financial ratios Gross NPL Loan Loss Coverage Net provisions / Avg net loans Net loans / Deposits Gross loan growth YoY Gross loan growth QoQ Deposit growth YoY Deposit growth QoQ Assets / Equity (x) Core ROE Core ROA Non-int inc / Total inc Cost income ratio Effective tax rate Yield on earning assets Cost of funds Net interest margin
2,266 (664) 1,602 912 2,514 (1,109) 1,405 (177) 6 1,234 (193) (33) 1,008 1,008
2,396 (653) 1,743 947 2,690 (1,218) 1,472 (137) 10 1,345 (197) (31) 1,117 1,117
2,452 (659) 1,793 844 2,637 (1,187) 1,450 (141) 10 1,320 (198) (33) 1,089 1,089
0.91% 145% 0.27%
0.88% 147% 0.20%
86% 8% 2% 7% 2% 11.8x 11.3% 0.96% 36% 44% 16% 2.38% 0.75% 1.68%
92% 9% 0% 2% -6% 11.5x 11.6% 1.00% 35% 45% 15% 2.41% 0.71% 1.75%
2% 1% 3% -11% -2% -3% -1% 3% 0% NM -2% 0% 6% -3% -3%
8% -1% 12% -7% 5% 7% 3% -21% 67% NM 7% 3% 0% 8% 8%
1,811 (656) 1,155 816 1,971 (800) 1,171 (162) 37 1,046 (176) (3) 867 867
1,938 (726) 1,212 714 1,926 (876) 1,050 (152) 40 938 (173) (3) 762 762
2,053 (749) 1,304 799 2,103 (883) 1,220 (177) 21 1,064 (192) (3) 870 870
0.90% 147% 0.20%
1.17% 147% 0.34%
1.21% 144% 0.31%
92% 8% 1% 1% 1% 11.5x 11.3% 0.98% 32% 45% 15% 2.41% 0.72% 1.76%
86% 11% 1% 14% 4% 11.5x 13.3% 1.16% 41% 41% 17% 2.68% 1.01% 1.71%
82% 7% 2% 12% 1% 10.9x 10.7% 0.98% 37% 45% 18% 2.83% 1.09% 1.77%
6% 3% 8% 12% 9% 1% 16% 16% -48% NM 13% 11% 0% 14% 14%
13% 14% 13% -2% 7% 10% 4% 9% -43% NM 2% 9% 0% 0% 0%
2,025 (779) 1,246 801 2,047 (870) 1,177 (97) 391 1,471 (184) (55) 1,232 841
2,105 (823) 1,282 803 2,085 (918) 1,167 (80) 78 136 1,301 (191) (62) 1,048 943
2,183 (841) 1,342 822 2,164 (952) 1,212 (104) 78 1,185 (190) (62) 934 934
1.25% 145% 0.35%
0.65% 158% 0.21%
0.69% 156% 0.15%
0.70% 160% 0.20%
83% 7% 1% 10% 2% 10.8x 12.1% 1.11% 38% 42% 18% 2.78% 1.10% 1.77%
85% 27% 15% 31% 18% 14.3x 13.0% 0.91% 39% 43% 13% 2.72% 1.10% 1.68%
84% 18% 0% 22% -2% 13.1x 12.1% 0.94% 39% 44% 15% 2.74% 1.13% 1.67%
83% 4% 1% 6% 2% 12.9x 12.0% 0.93% 38% 44% 16% 2.72% 1.14% 1.67%
4% 2% 5% 2% 4% 4% 4% 31% 0% NM -9% -1% 0% -11% -1%
8% 8% 8% 3% 6% 9% 3% 8% NM NM -19% 3% 13% -24% 11%
FIG Singapore Banks 22 October 2015
SG banks: 3Q15 earnings expectations
Source: HSBC
Core net profit
3Q14
2Q15
3Q15E
Q-o-Q %
YoY %
DBS UOB OCBC
1,008 867 841
1,117 762 943
1,089 870 934
-3% 14% -1%
8% 0% 11%
Source: Bloomberg, HSBC
Consensus 3Q15E 3Q15 HSBC vs Consensus % 1,056 806 914
3% 8% 2%
abc
Fig 21: SG banks: HSBC vs. Consensus 3Q15 expectations
abc
FIG Singapore Banks 22 October 2015
SG banks: Valuation charts Fig 22: DBS: One-year forward PBV (x)
Fig 23: DBS: One-year forward PE (x)
2.4x 2.2x 2.0x 1.8x 1.6x 1.4x 1.2x 1.0x 0.8x 0.6x
20x 18x 16x +1SD: 14x
14x
+1SD: 1.5x Avg: 1.2x
Avg: 11x
12x 10x
-1SD: 0.8x
8x
-1SD: 9x
Source: Bloomberg, HSBC
Source: Bloomberg, HSBC
Fig 24: UOB: One-year forward PBV (x)
Fig 25: UOB: One-year forward PE (x)
2.4x
22x
2.2x
+1SD: 1.7x
2.0x 1.8x
Avg: 1.4x
1.6x 1.4x
Jan-15
Jan-14
Jan-13
Jan-12
Jan-11
Jan-10
Jan-09
Jan-08
Jan-07
Jan-06
Jan-05
Jan-04
Jan-03
Jan-02
Jan-14
Jan-12
Jan-10
Jan-08
Jan-06
Jan-04
Jan-02
Jan-00
6x
20x 18x +1SD: 15x
16x
Avg: 13x
14x 12x
1.2x
10x
-1SD: 1.1x
1.0x
-1SD: 11x
8x
0.8x
Source: Bloomberg, HSBC
Source: Bloomberg, HSBC
Fig 26: OCBC: One-year forward PBV (x)
Fig 27: OCBC: One-year forward PE (x)
+1SD: 1.7x Avg: 1.4x
Source: Bloomberg, HSBC
Jan-14
Jan-12
Jan-10
Jan-08
Jan-06
Jan-04
Jan-02
Jan-00
-1SD: 1.1x
26x 24x 22x 20x 18x 16x 14x 12x 10x 8x 6x
Jan-15
Jan-14
Jan-13
Jan-12
+1SD: 16x Avg: 13x -1SD: 10x
Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15
2.2x 2.0x 1.8x 1.6x 1.4x 1.2x 1.0x 0.8x 0.6x
Jan-11
Jan-10
Jan-09
Jan-08
Jan-07
Jan-06
Jan-05
Jan-04
Jan-03
Jan-14
Jan-12
Jan-10
Jan-08
Jan-06
Jan-04
Jan-02
Jan-00
Jan-02
6x
0.6x
Source: Bloomberg, HSBC
13
abc
FIG Singapore Banks 22 October 2015
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14
FIG Singapore Banks 22 October 2015
abc
Appendix: Company financials
15
abc
FIG Singapore Banks 22 October 2015
Financials & valuation: DBS Income statement (SGDm) Year to Interest income Interest expense Net interest income Net fees & commissions Other income Operating income Operating expense Pre-prov op profit (PPOP) Provision charges Associates & amortization Non-op items Profit before tax Core profit before tax Taxation Minorities + preferences Attributable profit Core earnings Balance sheet summary (SGDm) Ordinary equity Customer loans (Net) Investment in securities Customer deposits Debt issued Interest earning assets Interest bearing liabilities Total assets Capital (%) RWA (SGDm) Fully loaded equity Tier 1 CAR Per share data (SGD) Core EPS Diluted core EPS DPS NTA BV Valuations PE (x) P/PPoP (x) P/NTA (x) PB (x) Dividend yield (%)
Buy
12/14a 8,948 (2,627) 6,321 2,027 1,270 9,618 (4,330) 5,288 (667) 79 198 4,898 4,700 (713) (148) 4,037 3,839
12/15e 9,704 (2,665) 7,040 2,331 1,397 10,768 (4,798) 5,970 (603) 80 136 5,583 5,447 (837) (148) 4,598 4,462
12/16e 10,179 (2,782) 7,396 2,797 1,537 11,730 (5,277) 6,453 (1,169) 80 5,364 5,364 (805) (148) 4,411 4,411
12/17e 10,683 (2,916) 7,767 3,077 1,690 12,534 (5,647) 6,887 (1,225) 80 5,743 5,743 (861) (148) 4,733 4,733
36,905 275,588 67,457 317,173 36,628 404,825 369,977 440,666
40,020 285,508 70,155 308,973 38,459 404,298 364,417 441,408
42,877 299,060 72,961 324,421 39,998 424,985 382,083 463,411
46,021 313,280 75,880 340,642 41,598 446,824 400,611 486,617
264,186 11.9% 15.3%
264,845 13.0% 17.0%
278,047 13.4% 17.2%
291,970 14.0% 16.2%
1.56 1.56 0.58 12.85 14.92
1.80 1.80 0.63 14.11 16.18
1.78 1.78 0.62 15.26 17.33
1.91 1.91 0.67 16.53 18.60
11x 8.4x 1.4x 1.2x 3.2%
10x 7.4x 1.3x 1.1x 3.5%
10x 6.9x 1.2x 1.0x 3.5%
9x 6.4x 1.1x 1.0x 3.7%
Price relative 23 22 21 20 19 18 17 16 15 14 13 2013
2014 DBS Group
Source: HSBC
16
2015 Rel to STRAITS TIMES INDEX
23 22 21 20 19 18 17 16 15 14 13 2016
Financial ratios and assumptions (%) Year to 12/14a Gross yield 2.38 Cost of funds 0.75 Net interest margin 1.68 Non-int inc/operating inc 34.3 Net loans/deposits 86.9 Cost/operating income ratio 45.0 Cost/average assets 1.0 Net provision/avg net loans 0.3 Gross NPLs/loans 0.9 Loan loss coverage 147.4 Effective tax rate 14.6 Core ROA 0.91 Core ROE 10.9 Growth (Y-o-Y, %) Earning assets 9.9 Total assets 9.6 Gross loans 10.7 Deposits 15.3 Net interest income 13.5 Non-interest income (1.8) Operating income 7.7 Total cost 10.5 Provision charges (13.4) Pre-provision profit 5.6 Core PBT 8.8 Core net profit 9.9 Core EPS 9.1 DPS (0.4) BVPS 9.1 ROE Decomposition Net Interest Income 1.50 Non-Interest Income 0.78 Operating Income 2.28 Operating Expenses (1.03) PPoP 1.26 Provisions (0.16) Non-op items 0.07 Op Inc before Tax 1.16 Taxation (0.17) Minorities & pref div (0.04) Attributable profit 0.96 Leverage 12.0x ROE 11.5 Source: Company data, HSBC estimates
12/15e 2.40 0.73 1.74 34.6 92.4 44.6 1.1 0.2 1.0 135.4 15.0 1.01 11.6
12/16e 2.45 0.75 1.78 36.9 92.2 45.0 1.2 0.4 1.2 132.7 15.0 0.98 10.6
12/17e 2.45 0.75 1.78 38.0 92.0 45.1 1.2 0.4 1.2 151.8 15.0 1.00 10.6
(0.1) 0.2 3.7 (8.4) 11.4 13.1 12.0 10.8 (9.6) 12.9 15.9 16.2 15.5 9.2 8.4
5.1 5.0 5.0 5.0 5.1 16.3 8.9 10.0 93.8 8.1 (1.5) (1.1) (1.1) (1.1) 7.1
5.1 5.0 5.0 5.0 5.0 10.0 6.9 7.0 4.8 6.7 7.1 7.3 7.3 7.3 7.3
1.60 0.85 2.44 (1.09) 1.35 (0.14) 0.05 1.27 (0.19) (0.03) 1.04 11.5x 12.0
1.63 0.96 2.59 (1.17) 1.43 (0.26) 0.02 1.19 (0.18) (0.03) 0.98 10.9x 10.6
1.64 1.00 2.64 (1.19) 1.45 (0.26) 0.02 1.21 (0.18) (0.03) 1.00 10.7x 10.6
Priced at close of 21 October 2015
abc
FIG Singapore Banks 22 October 2015
Financials & valuation: UOB
Buy Financial ratios and assumptions (%)
Income statement(SGDm) Year to
12/14a
Interest income Interest expense Net interest income Net fees & commissions Other income Operating income Operating expense Pre-prov op profit (PPOP) Provision charges Associates & amortization Non-op items Profit before tax Taxation Minorities + preferences Attributable profit Core net profit
12/15e
12/16e
12/17e
Year to Gross yield Cost of funds Net interest margin Non-int inc/operating inc Net loans/deposits Cost/operating income ratio Cost/average assets Net provision/ avg net loans Gross NPLs/loans Loan loss coverage Effective tax rate Core ROA Core ROE
7,190 (2,632) 4,558 1,749 1,055 7,362 (3,146) 4,216 (635) 129 115 3,825 (561) (122) 3,142 3,027
7,989 (2,940) 5,049 1,924 1,108 8,081 (3,461) 4,620 (680) 116 4,057 (609) (124) 3,324 3,324
8,714 (3,287) 5,427 2,212 1,163 8,802 (3,807) 4,996 (1,167) 118 3,947 (592) (124) 3,231 3,231
9,214 (3,470) 5,744 2,434 1,221 9,399 (4,111) 5,288 (1,000) 121 4,409 (661) (126) 3,622 3,622
27,389 195,903 30,076 233,750 20,953 289,754 266,880 306,736
29,526 207,404 31,580 250,113 21,163 309,139 283,939 326,353
31,607 217,022 33,159 265,119 21,374 327,144 299,664 344,595
33,289 227,613 34,817 281,026 21,588 345,635 316,312 363,380
178,792 12.6% 16.9%
189,285 13.0% 17.3%
199,865 13.4% 17.5%
210,760 13.8% 17.7%
1.89 1.89 0.75 14.50 17.09
2.06 2.06 0.73 15.83 18.42
2.00 2.00 0.71 17.13 19.72
2.24 2.24 0.79 18.15 20.77
11x 7.7x 1.4x 1.2x 3.7%
10x 7.0x 1.3x 1.1x 3.6%
10x 6.5x 1.2x 1.0x 3.5%
9x 6.1x 1.1x 1.0x 3.9%
Balance sheet summary (SGDm) Ordinary equity Customer loans (Net) Investment in securities Customer deposits Debt issued Interest earning assets Interest bearing liabilities Total assets Capital (%) RWA (SGDm) Transitional equity Tier 1 CAR Per share data (SGD) Core EPS Core diluted EPS DPS NTA BV Valuations multiples PE P/PPoP P/NTA PB Dividend yield (%) Price relative
2014 UOB
2015
12/15e
12/16e
12/17e
2.69 1.05 1.71 38.1 83.8 42.7 1.1 0.34 1.18 146 15 1.06 11.7
2.67 1.07 1.69 37.5 82.9 42.8 1.1 0.34 1.25 148 15 1.08 11.7
2.74 1.13 1.71 38.3 81.9 43.2 1.1 0.55 1.35 162 15 1.00 10.6
2.74 1.13 1.71 38.9 81.0 43.7 1.2 0.45 1.30 177 15 1.05 11.2
8.3 7.9 9.5 15.7 10.6 7.8 9.6 8.6 32.0 10.3 5.5 6.6 8.5 0.0 11.3
6.7 6.4 6.0 7.0 10.8 8.1 9.8 10.0 7.0 9.6 6.1 5.6 9.0 -3.2 7.8
5.8 5.6 5.0 6.0 7.5 11.3 8.9 10.0 71.8 8.1 -2.7 -2.7 -2.8 -2.8 7.0
5.7 5.5 5.0 6.0 5.9 8.3 6.8 8.0 -14.3 5.9 11.7 11.7 12.1 12.1 5.3
1.54 0.95 2.49 -1.06 1.43 -0.21 0.08 1.21 -0.19 -0.01 1.06 11.5 12.2
1.60 0.96 2.55 -1.09 1.46 -0.21 0.04 1.24 -0.19 -0.01 1.05 11.1 11.7
1.62 1.01 2.62 -1.13 1.49 -0.35 0.04 1.14 -0.18 -0.01 0.96 11.0 10.6
1.62 1.03 2.66 -1.16 1.49 -0.28 0.03 1.21 -0.19 -0.01 1.02 10.9 11.2
Growth (Y-o-Y, %) Earning assets Total assets Gross loans Deposits Net interest income Non-interest income Operating income Total cost Provision charges Pre-provision profit PBT Net profit before pref div Core diluted EPS DPS BVPS ROE decomposition (%) Net Interest Inc / Avg assets Non-Interest Inc / Avg assets Operating Income / Avg assets Operating Expenses / Avg assets PPOP / Avg assets Provisions / Avg assets Non-op items / Avg assets Op Inc before Tax / Avg assets Taxation / Avg assets Minorities / Avg assets Attributable profit / Avg assets Leverage (x) ROE Source: HSBC estimates
26 25 24 23 22 21 20 19 18 17 2013
12/14a
Priced at close of 21 October 2015
26 25 24 23 22 21 20 19 18 17 2016
Rel to STRAITS TIMES INDEX
Source: HSBC
17
abc
FIG Singapore Banks 22 October 2015
Financials & valuation: OCBC
Hold Financial ratios and assumptions (%)
P&L summary (SGDm) Year to 12/14a Interest income 7,607 Interest expense (2,871) Net interest income 4,736 Net fees & commissions 1,495 Insurance income 930 Other income 757 Operating income 7,918 Operating expense (3,258) Pre-prov op profit (PPOP) 4,660 Provision charges (357) Associates & amortization 38 Non-op items 422 Profit before tax 4,763 Taxation (687) Minorities + preferences (342) Attributable profit 3,734 Core net profit 3,312 Balance sheet summary (SGDm) Ordinary equity 29,701 Customer loans (Net) 207,535 Investment in securities 45,715 Customer deposits 245,519 Debt issued 28,859 Life assurance fund liabilities 57,224 Interest earning assets 319,784 Interest bearing liabilities 294,881 Total assets 401,226
12/15e 8,620 (3,381) 5,239 1,570 977 780 8,565 (3,714) 4,850 (354) 296 136 4,928 (764) (357) 3,807 3,671
12/16e 9,170 (3,582) 5,588 1,727 1,123 819 9,257 (4,086) 5,171 (751) 335 4,755 (808) (344) 3,602 3,602
12/17e 9,643 (3,809) 5,833 1,813 1,179 860 9,685 (4,494) 5,191 (662) 348 4,877 (829) (311) 3,738 3,738
33,198 211,828 48,001 255,143 30,013 59,577 334,816 306,480 419,522
36,504 217,547 50,401 267,901 31,214 61,961 352,753 321,290 440,880
39,945 223,550 52,921 281,296 32,462 64,439 371,535 336,821 463,220
Capital (%) RWA (SGDm) Fully loaded core Tier 1 CAR
188,108 10.6 15.9
188,785 12.4 16.4
198,396 13.5 17.2
213,081 14.2 17.6
Per share data (SGD) EPS Diluted EPS DPS NTA BV
0.93 0.93 0.36 6.16 7.46
0.91 0.91 0.37 6.82 8.05
0.86 0.86 0.35 7.40 8.57
0.86 0.86 0.35 7.98 9.09
Valuation multiples PE (x) P / PPoP (x) P/NTA (x) P/BV (x) Dividend yield (%)
10x 8.0x 1.5x 1.3x 3.8%
10x 8.0x 1.4x 1.2x 3.9%
11x 7.7x 1.3x 1.1x 3.7%
11x 7.9x 1.2x 1.0x 3.7%
Price relative 11.5
11.5
11
11
10.5
10.5 10
10
9.5
9.5 9
9
8.5
8.5 8 2013
2014 OCBC
Source: HSBC
18
2015 Rel to STRAITS TIMES INDEX
8 2016
Year to Gross yield Cost of funds Net interest margin Non-int inc/operating inc Net loans/deposits Cost/operating income ratio Cost/average assets Net provision/ avg net loans Gross NPLs/loans Loan loss coverage Effective tax rate Core RoA Core RoE Growth (y-o-y, %) Earning assets Total assets Gross loans Deposits Net interest income Non-interest income Operating income Total cost Provision charges Pre-provision profit PBT Core net profit Core EPS DPS BVPS
12/14a 2.70 1.07 1.68 40 85 41 0.88 0.19 0.61 174 14 0.92 12.4
12/15e 2.63 1.12 1.60 39 83 43 0.91 0.17 0.75 158 16 0.93 11.7
12/16e 2.67 1.14 1.63 40 81 44 0.95 0.35 0.90 164 17 0.86 10.3
12/17e 2.66 1.16 1.61 40 79 46 0.99 0.30 0.90 189 17 0.84 9.8
20 19 24 25 22 16 20 17 34 21 34 25 20 6 8
5 5 2 4 11 5 8 14 -1 4 3 11 -2 3 8
5 5 3 5 7 10 8 10 112 7 -4 -2 -5 -6 6
5 5 3 5 4 5 5 10 -12 0 3 4 1 -1 6
1.28 0.86 2.14 (0.88) 1.26 (0.10) 0.12 1.29 (0.19) (0.06) 1.01 13.8 14.0
1.28 0.81 2.09 (0.91) 1.18 (0.09) 0.11 1.20 (0.19) (0.06) 0.93 13.0 12.1
1.30 0.85 2.15 (0.95) 1.20 (0.17) 0.08 1.11 (0.19) (0.06) 0.84 12.3 10.3
1.29 0.85 2.14 (0.99) 1.15 (0.15) 0.08 1.08 (0.18) (0.05) 0.83 11.8 9.8
ROE decomposition Net Interest Income Non-Interest Income Operating Income Operating Expenses PPOP Provisions Non-op items Op Inc before Tax Taxation Minorities Attributable profit Leverage ROE Source: Company data, HSBC estimates
Priced at close of 21 October 2015
FIG Singapore Banks 22 October 2015
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Valuations and risks OCBC (OCBC SP, SGD9.36; Hold, TP SGD10.20): We set our fair value target price at SGD10.20 per share based on an intrinsic PB multiple derived from the Gordon growth model. Our target price assumes a 10% sustainable RoE, 9.1% cost of equity, and a 4% growth rate. This implies a 1.2x December 2016e BV and 11x 2016e EPS. Our target price implies 9% upside. Key downside risks include: merger hiccups following the acquisition of Wing Hang Bank, a sustained low interest rate environment, and unexpected and sustained deterioration in asset quality. Key upside risks include: stronger-than-expected contributions from OCBC Wing Hang Bank, a moderate increase in interest rates, and a sustained benign asset quality environment. DBS (DBS SP, SGD17.90, Buy, TP SGD20.00): We set our fair value target price at SGD20.00, based on an intrinsic PB multiple derived from the Gordon growth model. Our target price assumes a 10.6% sustainable ROE, a 9.5% cost of equity, and a 2% growth rate. This implies a 1.2x December 2016e BV and 11.2x 2016e EPS. Our target price implies 12% upside. Key downside risks include: slower-than-expected loan growth, sustained low interest rate environment, and potential deterioration of asset quality. UOB (UOB SP, SGD20.10, Buy, TP SGD26.10): We value UOB at SGD26.10 per share based on an intrinsic PB multiple derived from the Gordon Growth model. Our target price assumes an 11.2% sustainable RoE, a 9.4% cost of equity, and a 4% growth rate. This implies 1.3x December 2016e BV and 13x 2016e EPS. As our target price implies upside of 30%, we maintain Buy rating on the stock. Key downside risks include: a sustained low interest rate environment, an unexpected deterioration in asset quality and a significant slowdown in non-interest income.
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FIG Singapore Banks 22 October 2015
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Disclosure appendix Analyst Certification The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Kar Weng Loo
Important disclosures Equities: Stock ratings and basis for financial analysis
HSBC believes an investor’s decision to buy or sell a stock should depend on individual circumstances such as the investor’s existing holdings, risk tolerance and other considerations and that investors utilise various disciplines and investment horizons when making investment decisions. Ratings should not be used or relied on in isolation as investment advice. Different securities firms use a variety of ratings terms as well as different rating systems to describe their recommendations and therefore investors should carefully read the definitions of the ratings used in each research report. Further, investors should carefully read the entire research report and not infer its contents from the rating because research reports contain more complete information concerning the analysts’ views and the basis for the rating. From 23rd March 2015 HSBC has assigned ratings on the following basis:
The target price is based on the analyst’s assessment of the stock’s actual current value, although we expect it to take six to 12 months for the market price to reflect this. When the target price is more than 20% above the current share price, the stock will be classified as a Buy; when it is between 5% and 20% above the current share price, the stock may be classified as a Buy or a Hold; when it is between 5% below and 5% above the current share price, the stock will be classified as a Hold; when it is between 5% and 20% below the current share price, the stock may be classified as a Hold or a Reduce; and when it is more than 20% below the current share price, the stock will be classified as a Reduce. Our ratings are re-calibrated against these bands at the time of any ‘material change’ (initiation or resumption of coverage, change in target price or estimates). Upside/Downside is the percentage difference between the target price and the share price. Prior to this date, HSBC’s rating structure was applied on the following basis:
For each stock we set a required rate of return calculated from the cost of equity for that stock’s domestic or, as appropriate, regional market established by our strategy team. The target price for a stock represented the value the analyst expected the stock to reach over our performance horizon. The performance horizon was 12 months. For a stock to be classified as Overweight, the potential return, which equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated, had to exceed the required return by at least 5 percentage points over the succeeding 12 months (or 10 percentage points for a stock classified as Volatile*). For a stock to be classified as Underweight, the stock was expected to underperform its required return by at least 5 percentage points over the succeeding 12 months (or 10 percentage points for a stock classified as Volatile*). Stocks between these bands were classified as Neutral. *A stock was classified as volatile if its historical volatility had exceeded 40%, if the stock had been listed for less than 12 months (unless it was in an industry or sector where volatility is low) or if the analyst expected significant volatility. However, stocks which we did not consider volatile may in fact also have behaved in such a way. Historical volatility was defined as the past month’s average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating, however, volatility had to move 2.5 percentage points past the 40% benchmark in either direction for a stock’s status to change.
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FIG Singapore Banks 22 October 2015
Rating distribution for long-term investment opportunities As of 22 October 2015, the distribution of all ratings published is as follows: Buy 46% (31% of these provided with Investment Banking Services) Hold
40%
(29% of these provided with Investment Banking Services)
Sell
14%
(17% of these provided with Investment Banking Services)
For the purposes of the distribution above the following mapping structure is used during the transition from the previous to current rating models: under our previous model, Overweight = Buy, Neutral = Hold and Underweight = Sell; under our current model Buy = Buy, Hold = Hold and Reduce = Sell. For rating definitions under both models, please see “Stock ratings and basis for financial analysis” above.
Share price and rating changes for long-term investment opportunities Recommendation & target price history
OCBC (OCBC.SI) share price performance SGD vs HSBC rating history
From
13 12 11 10 9 8 7 6 5 4 3
Oct-15
Oct-14
Oct-13
Oct-12
Oct-11
Oct-10
Neutral Overweight Buy Target price
To
Date
Overweight Buy Hold Value
7 October 2014 25 March 2015 3 May 2015 Date
9.95 10.82 10.00 10.87 10.29 9.95 13.00 12.85 11.30
17 February 2013 26 April 2013 11 July 2013 5 August 2013 15 January 2014 17 February 2014 7 October 2014 11 February 2015 3 May 2015
Price 1 Price 2 Price 3 Price 4 Price 5 Price 6 Price 7 Price 8 Price 9 Source: HSBC
Source: HSBC
Recommendation & target price history
UOB (UOBH.SI) share price performance SGD vs HSBC rating history
From
26 24 22 20 18 16 14 12 10 8
Source: HSBC
Oct-15
Oct-14
Oct-13
Oct-12
Oct-11
Oct-10
Overweight Neutral Underweight Neutral Overweight Target price Price 1 Price 2 Price 3 Price 4 Price 5 Price 6 Price 7 Price 8
To
Date
Neutral Underweight Neutral Overweight Buy Value
27 February 2013 2 May 2013 10 July 2013 23 July 2014 25 March 2015 Date
19.65 21.60 20.55 22.35 21.70 21.90 26.80 26.95
27 February 2013 26 April 2013 11 July 2013 1 August 2013 15 January 2014 17 February 2014 23 July 2014 28 October 2014
Source: HSBC
21
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FIG Singapore Banks 22 October 2015
DBS Group (DBSM.SI) share price performance SGD vs HSBC rating history
Recommendation & target price history From
24 22 20 18 16 14 12 10 8 6
Source: HSBC
22
Oct-15
Oct-14
Oct-13
Oct-12
Oct-11
Oct-10
Neutral Overweight Target price Price 1 Price 2 Price 3 Price 4 Price 5 Price 6 Price 7 Price 8 Price 9 Source: HSBC
To
Date
Overweight Buy Value
10 July 2013 25 March 2015 Date
17.00 18.65 18.50 19.80 19.00 19.25 24.80 25.00 23.60
26 April 2013 2 May 2013 11 July 2013 1 August 2013 15 January 2014 16 February 2014 23 July 2014 28 October 2014 7 September 2015
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FIG Singapore Banks 22 October 2015
HSBC & Analyst disclosures Disclosure checklist Company DBS GROUP OCBC UOB
Ticker
Recent price
Price date
Disclosure
DBSM.SI OCBC.SI UOBH.SI
17.90 9.36 20.10
21-Oct-2015 21-Oct-2015 21-Oct-2015
6, 7 1, 2, 6 2, 6, 7
Source: HSBC
1 2 3 4 5 6 7 8 9 10 11
HSBC has managed or co-managed a public offering of securities for this company within the past 12 months. HSBC expects to receive or intends to seek compensation for investment banking services from this company in the next 3 months. At the time of publication of this report, HSBC Securities (USA) Inc. is a Market Maker in securities issued by this company. As of 30 September 2015 HSBC beneficially owned 1% or more of a class of common equity securities of this company. As of 31 August 2015, this company was a client of HSBC or had during the preceding 12 month period been a client of and/or paid compensation to HSBC in respect of investment banking services. As of 31 August 2015, this company was a client of HSBC or had during the preceding 12 month period been a client of and/or paid compensation to HSBC in respect of non-investment banking securities-related services. As of 31 August 2015, this company was a client of HSBC or had during the preceding 12 month period been a client of and/or paid compensation to HSBC in respect of non-securities services. A covering analyst/s has received compensation from this company in the past 12 months. A covering analyst/s or a member of his/her household has a financial interest in the securities of this company, as detailed below. A covering analyst/s or a member of his/her household is an officer, director or supervisory board member of this company, as detailed below. At the time of publication of this report, HSBC is a non-US Market Maker in securities issued by this company and/or in securities in respect of this company
HSBC and its affiliates will from time to time sell to and buy from customers the securities/instruments (including derivatives) of companies covered in HSBC Research on a principal or agency basis. Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment banking revenues. Whether, or in what time frame, an update of this analysis will be published is not determined in advance. For disclosures in respect of any company mentioned in this report, please see the most recently published report on that company available at www.hsbcnet.com/research.
Additional disclosures 1 2 3
4
This report is dated as at 22 October 2015. All market data included in this report are dated as at close 21 October 2015, unless otherwise indicated in the report. HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its Research business. HSBC’s analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBC’s Investment Banking business. Information Barrier procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner. As of 9 October 2015, HSBC owned a significant interest in the debt securities of the following company(ies): DBS GROUP
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FIG Singapore Banks 22 October 2015
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Disclaimer Legal entities as at 30 May 2014: Issuer of report ‘UAE’ HSBC Bank Middle East Limited, Dubai; ‘HK’ The Hongkong and Shanghai Banking Corporation Limited, Hong Kong; The Hongkong and Shanghai Banking ‘TW’ HSBC Securities (Taiwan) Corporation Limited; ‘CA’ HSBC Bank Canada, Toronto; HSBC Bank, Paris Branch; HSBC Corporation Limited, Singapore Branch France; ‘DE’ HSBC Trinkaus & Burkhardt AG, Düsseldorf; 000 HSBC Bank (RR), Moscow; ‘IN’ HSBC Securities and Capital 21 Collyer Quay #03-01 Markets (India) Private Limited, Mumbai; ‘JP’ HSBC Securities (Japan) Limited, Tokyo; ‘EG’ HSBC Securities Egypt SAE, Cairo; HSBC Building ‘CN’ HSBC Investment Bank Asia Limited, Beijing Representative Office; The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch; The Hongkong Singapore 049320 and Shanghai Banking Corporation Limited, Seoul Branch; HSBC Securities (South Africa) (Pty) Ltd, Johannesburg; HSBC Bank Website: www.research.hsbc.com plc, London, Madrid, Milan, Stockholm, Tel Aviv; ‘US’ HSBC Securities (USA) Inc, New York; HSBC Yatirim Menkul Degerler AS, Istanbul; HSBC México, SA, Institución de Banca Múltiple, Grupo Financiero HSBC; HSBC Bank Brasil SA – Banco Múltiplo; HSBC Bank Australia Limited; HSBC Bank Argentina SA; HSBC Saudi Arabia Limited; The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch incorporated in Hong Kong SAR; The Hongkong and Shanghai Banking Corporation Limited, Bangkok Branch This document has been issued by The Hongkong and Shanghai Banking Corporation Limited Singapore Branch (“HSBC”) for the information of its institutional customers and/or other persons specified in Sections 274 and 304 of the Securities and Futures Act (Chapter 289)(“SFA”) and accredited investors and other persons in accordance with the conditions specified in Sections 275 and 305 of the SFA; it is not intended for and should not be distributed to retail customers. The Hongkong and Shanghai Banking Corporation Limited Singapore Branch is regulated by the Monetary Authority of Singapore. Recipients in Singapore should contact a representative of “The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch” in respect of any matters arise from, or in connection with this report. The information and materials contained herein are provided “as is” without warranty of any kind, either express or implied. In particular, no warranty regarding the accuracy or fitness for a purpose is given in connection with such information and materials. This document does not have any regard to the specific investment objectives, financial situation and particular needs of any specific recipient. It is for information purposes only and is not intended to nor will it create or induce the creation of any binding legal relations. It does not constitute or form part of any offer or solicitation of any offer to buy or sell any securities. Independent advice should be sought before making any investments or entering into any transaction in relation to any securities mentioned herein. In no event will any member of the HSBC group be liable to the recipient for any direct or indirect or any other damages of any kind arising from or in connection with reliance on any information and materials herein. Members of the HSBC group and their associates, directors, officers and/or employees may have positions in, and may effect transactions in the securities or investment instruments covered herein, and may also perform or seek to perform broking, investment banking, corporate finance or other services for the issuers of the securities mentioned herein. All enquiries by recipients in Hong Kong must be directed to your HSBC contact in Hong Kong. The Hongkong and Shanghai Banking Corporation Limited is regulated by the Hong Kong Monetary Authority. In Hong Kong it is for the information of its institutional and professional investor (as defined by Securities and Future Ordinance (Chapter 571)) customers only; it is not intended for and should not be distributed to retail customers in Hong Kong. If it is received by a customer of an affiliate of HSBC, its provision to the recipient is subject to the terms of business in place between the recipient and such affiliate. This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. HSBC has based this document on information obtained from sources it believes to be reliable but which it has not independently verified; HSBC makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of the Research Division of HSBC only and are subject to change without notice. HSBC and its affiliates and/or their officers, directors and employees may have positions in any securities mentioned in this document (or in any related investment) and may from time to time add to or dispose of any such securities (or investment). HSBC and its affiliates may act as market maker or have assumed an underwriting commitment in the securities of companies discussed in this document (or in related investments), may sell them to or buy them from customers on a principal basis and may also perform or seek to perform investment banking or underwriting services for or relating to those companies. In Korea, this publication is distributed by either The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch (“HBAP SLS”) or The Hongkong and Shanghai Banking Corporation Limited, Seoul Branch (“HBAP SEL”) for the general information of professional investors specified in Article 9 of the Financial Investment Services and Capital Markets Act (“FSCMA”). This publication is not a prospectus as defined in the FSCMA. It may not be further distributed in whole or in part for any purpose. Both HBAP SLS and HBAP SEL are regulated by the Financial Services Commission and the Financial Supervisory Service of Korea. HSBC Securities (USA) Inc. accepts responsibility for the content of this research report prepared by its non-US foreign affiliate. All US persons receiving and/or accessing this report and wishing to effect transactions in any security discussed herein should do so with HSBC Securities (USA) Inc. in the United States and not with its non-US foreign affiliate, the issuer of this report. In the UK this report may only be distributed to persons of a kind described in Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005. The protections afforded by the UK regulatory regime are available only to those dealing with a representative of HSBC Bank plc in the UK. In Singapore, this publication is distributed by The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch for the general information of institutional investors or other persons specified in Sections 274 and 304 of the Securities and Futures Act (Chapter 289) (“SFA”) and accredited investors and other persons in accordance with the conditions specified in Sections 275 and 305 of the SFA. This publication is not a prospectus as defined in the SFA. It may not be further distributed in whole or in part for any purpose. The Hongkong and Shanghai Banking Corporation Limited Singapore Branch is regulated by the Monetary Authority of Singapore. Recipients in Singapore should contact a representative of “The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch” in respect of any matters arise from, or in connection with this report. Further, without prejudice to any of the foregoing disclaimers, where this material is distributed to accredited investors or expert investors as defined in Regulation 2 of the Financial Advisers Regulations (“FAR”) of the Financial Advisers Act (Cap. 110) of Singapore (“FAA”), The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch is exempted by Regulation 35 of the FAR from the requirements in Section 36 of the FAA mandating disclosure of any interest in securities referred to in this material, or in their acquisition or disposal. Recipients who do not fall within the description of persons under Regulations 34 and 35 of the Financial Advisers Regulations should seek the advice of their independent financial advisor prior to taking any investment decision based on this document or for any necessary explanation of its contents. In Australia, this publication has been distributed by The Hongkong and Shanghai Banking Corporation Limited (ABN 65 117 925 970, AFSL 301737) for the general information of its “wholesale” customers (as defined in the Corporations Act 2001). Where distributed to retail customers, this research is distributed by HSBC Bank Australia Limited (AFSL No. 232595). These respective entities make no representations that the products or services mentioned in this document are available to persons in Australia or are necessarily suitable for any particular person or appropriate in accordance with local law. No consideration has been given to the particular investment objectives, financial situation or particular needs of any recipient. This publication is distributed in New Zealand by The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch incorporated in Hong Kong SAR. In Japan, this publication has been distributed by HSBC Securities (Japan) Limited. 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No part of this publication may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of The Hongkong and Shanghai Banking Corporation Limited Singapore Branch. MICA (P) 073/06/2015 , MICA (P) 136/02/2015 and MICA (P) 041/01/2015
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Global Financial Institution Group Research Team Carlo Digrandi Global Head of Financial Institutions Research +44 20 7991 6843
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Banks Europe Robin Down Analyst, Global Sector Head, Banks +44 20 7991 6926
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