12 September 2013 Asia Pacific/Singapore Equity Research Banks
Singapore Banks Sector Research Analysts Anand Swaminathan 65 6212 3012
[email protected]
SECTOR REVIEW
FY14 earnings risks: Looking for relative safety Figure 1: Core CS ROE—market implied and under risk scenarios (%) (2014E) Market implied ROE
14.0 12.0
10.7 11.1 10.6
10.0
Base case
11.5
12.0
Normalised
12.1
11.5 10.2
9.7
Stressed
11.4
10.5
9.6
8.0 6.0 4.0 2.0 0.0 DBS
UOB
OCBC
Source: Credit Suisse estimates
■ An imminent slowdown after a record 1H13. 1H13 was marked by record profits for Singapore banks driven by better-than-expected strength in noninterest income and loan growth. But the macro-economic environment in their core markets (mainly Singapore, ASEAN, and India) has seen a visible deterioration over the past few months, thereby increasing earnings risks. While we are unlikely to see significant impact in 2H13, there are material risks to 2014 consensus earnings expectations. ■ 5–22% downside risk to 2014E earnings—OCBC most at risk. We assess 2014E earnings risks under ‘normalisation’ and ‘stressed’ scenarios for various earnings drivers. While DBS appears to be relatively safe under both scenarios, UOB (higher SGD funding costs) and OCBC (SGD/USD funding costs, normalisation in credit costs) appear to be more at risk. The overall downside risk to earnings could be 5–10% under a 'normalisation' scenario and 18–22% under a ‘stressed’ scenario. OCBC’s earnings could be the most at risk under both scenarios if OCBC is unable to repeat its stellar asset quality performance seen during the 2005–09 cycle. ■ DBS remains our top pick—lower earnings risks + valuation catch-up. In our view, DBS has the most potential for upside as P/B multiples play catch-up with the improvement seen in ROEs and relatively low earnings downside under the risk scenarios through 2014E. On the other hand, we find OCBC to be richly valued (market-implied ROEs already higher than our expectations) with potential downside if one of our risk scenarios plays out. UOB remains a defensive play in this environment with valuations close to warranted levels. DBS remains our top pick in the sector. DISCLOSURE APPENDIX CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON US ANALYSTS. US
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12 September 2013
Focus charts and table Figure 2: 2014E scenario analysis Assumptions
Impact on 2014E profits (%)
2014E ROE (%)
DBS
UOB
OCBC
DBS
UOB
OCBC
Loan growth (YoY%)
Base case Normalisation Stressed
10.0 7.0 3.9
8.0 6.0 4.0
9.0 6.7 4.2
-1.0 -1.8
-0.8 -1.2
-0.8 -1.3
NIMs (bp change YoY)
Base case Normalisation Stressed
5 0 -5
4 0 -8
4 0 -8
-2.2 -4.2
-1.6 -4.8
-1.6 -4.8
Credit costs (bp)
Base case Normalisation Stressed
35 40 60
30 40 60
24 40 60
-3.0 -15.0
-5.0 -15.0
-8.0 -18.0
Overall
Base case Normalisation Stressed
-5.0 -18.0
-7.0 -18.0
-10.0 -22.0
DBS
UOB
OCBC
11.1 10.6 9.7
12.0 11.5 10.2
11.4 10.5 9.6
Source: Credit Suisse estimates
Figure 3: Singapore dollar (S$) loan-deposit ratio (%) 100
4Q07
4Q09
4Q10
4Q12
2Q13
90
140
95 86 81
77
80
82
85 84
79
'00-'04
'05-'09
'10-1H13
132
116 102
100
60
60
60
120
'95-'99
80
69 70
70
Figure 4: Average SP+GP on loans (bp)
55
47 35
40
50
46
39
34
34
51 50
20
40 DBS S$
UOB S$
OCBC S$
Figure 5: P/B relative less ROE relative (%) 60%
OCBC/DBS PB-ROE
11
16
0 DBS
UOB
OCBC
Figure 6: Warranted P/B under stress scenarios(x)
OCBC/UOB PB-ROE
1.6
CS target
1.4
40%
1.2
20%
Normalised
1.3
1.2
1.3
1.1 1.1
Stressed
1.3 1.3
1.2
1.2 1.1
1.0
1.0
0%
Current
1.0
0.8
0.6
-20%
0.4
-40%
-60% Dec/01
0.2
Dec/03
Dec/05
Dec/07
Dec/09
Dec/11
0.0 DBS
UOB
OCBC
Source: Credit Suisse research
Singapore Banks Sector
2
12 September 2013
FY14 earnings risks: Looking for relative safety 1H13 was marked by record profits for Singapore banks driven by better-than-expected strength in non-interest income and loan growth. But the macro-economic environment in their core markets (primarily Singapore+ASEAN+India) has seen a visible deterioration over the past few months, thereby increasing earnings risks. While we are unlikely to see significant impact in 2H13, risks to 2014E earnings have increased.
Three key earnings risks in the near to medium term Loan growth: Singapore banks’ strong overall loan growth has been helped by a renewed strength in regional trade finance, offshore corporate loan bookings and steady mortgage growth in Singapore. However, with further downgrades to regional GDP growth estimates and an imminent slowdown in mortgages, the risks are to the downside in the next few quarters.
A NIM recovery in 2014 becoming less probable, while credit costs are already going up
Net interest margins: Investors now appear more optimistic about a potential NIM recovery. We believe the consensus might be getting too bullish about FY14 NIM prospects given: (1) ASEAN loan growth being bound to slow along with further NIM pressure, (2) continued SGD funding competition and (3) stress in USD funding markets. Credit costs: We have probably seen the bottom for this cycle in terms of credit costs. Singapore banks’ managements now expect a normalisation in credit costs going into 2014. Given the historical low net interest margins, profit sensitivity to higher credit costs is now probably higher than the previous cycles.
Assessing downside risks to 2014 earnings expectations We assess earnings risks under two scenarios: (1) Normalised (mild loan growth slowdown, flat NIMs and credit costs moving towards historical averages) and (2) Stressed (steeper-than-expected growth slowdown, further NIM compression from funding costs and credit costs moving up above historical averages).
OCBC could see the biggest earnings risk even if credit costs just 'normalise'
Loan growth (1–2% earnings impact): With increasing optimism on Greater China and pessimism on ASEAN, DBS is relatively well placed due to lower ASEAN exposure. Net interest margins (2–5%): Stretched SGD (UOB) and USD (DBS and OCBC) balance sheets pose the key risks to margins going into 2014. DBS is relatively well placed. Credit costs (3–18%): OCBC might see the biggest earnings risk if it is not able to repeat its superior performance of the 2005–09 cycle (it has also seen the least conservative provisioning this cycle). DBS and UOB look relatively well placed.
Stress testing valuations: OCBC looks relatively stretched On trailing P/B (1.2x), while Singapore banks are now trading 1 sd below historical average, their premium to the NJA banks sector is close to historical highs. On a relative basis, DBS appears to have sustainably closed some of the ROE discount to peers—but its P/B discount is still close to historical averages. The market-implied ROEs for OCBC appear to be the most optimistic and higher than our near-term expectations, leaving no room for surprise. On P/PPOP multiples (which exclude loan loss provisioning), OCBC trades at a significant premium to peers and much above the historical average levels.
DBS is our top pick—lower earnings risks and potential for valuations to catch-up with better ROEs
Based on our estimates, DBS has the most potential for upside—as P/B multiples play catch-up with the sustainable improvement in ROEs and relatively low downside risks under the normalised or stressed scenarios through 2014E. OCBC’s valuations on the other hand are already rich and potentially have more downside if one of our risk scenarios play out. UOB remains a defensive play in this environment with valuation levels close to warranted levels. DBS remains our top pick in the sector.
Singapore Banks Sector
3
12 September 2013
Valuation comparison Figure 7: Singapore banks—price performance As of DBSM.SI UOBH.SI OCBC.SI .FTSTI
11-Sep-13 DBS UOB OCBC STI Index
Price CS Tgt S$ 16.31 20.45 10.01 3,108
Upside
S$ 19.00 22.00 10.20
% 16% 8% 2%
Absolute price performance (%) 1D -1.2 0.4 -0.3 -0.5
1W 2.2 2.1 1.7 3.1
1M -5.2 -6.0 -6.8 -3.8
3M 1.6 1.6 -0.9 -2.0
6M 12M YTD 5.5 12.0 9.9 3.2 7.0 3.2 -3.3 7.1 2.9 -5.6 3.0 -1.9
2012 28.8 29.7 24.3 19.7
2011 -19.6 -16.1 -20.7 -17.0
2010 -7.0 -7.6 8.6 10.1
2009 82.9 52.5 82.4 64.5
2008 -52.8 -35.1 -39.8 -49.2
2007 -8.4 2.6 7.7 18.7
Source: Bloomberg, Credit Suisse research
Figure 8: Singapore banks—valuation comparison 11-Sep-13 2008 2009 2010 Cash core profit (S$ mn) DBS 2,036 2,034 2,620 UOB 1,889 1,806 2,368 OCBC 1,493 1,744 2,218 Reported FDEPS (S$) DBS 1.02 0.87 0.67 UOB 1.24 1.19 1.70 OCBC 0.55 0.58 0.65 Cash core FDEPS (S$) DBS 1.09 0.88 1.09 UOB 1.25 1.20 1.55 OCBC 0.48 0.54 0.67 P/E on reported FDEPS (x) DBS 16.0 18.8 24.4 UOB 16.5 17.2 12.0 OCBC 18.3 17.1 15.4 Book value per share (S$) DBS 11.1 11.0 11.4 UOB 8.9 11.2 12.5 OCBC 4.5 5.2 5.6 Cash core ROA (%) DBS 0.83 0.79 0.97 UOB 1.06 0.98 1.19 OCBC 0.84 0.93 1.05 Cash core RONTA (%) DBS 14.3 12.3 12.8 UOB 17.6 16.6 17.1 OCBC 13.6 14.4 15.7 Dividend per share (S$) DBS 0.55 0.56 0.56 UOB 0.60 0.60 0.70 OCBC 0.28 0.28 0.30 Pre-provision optg profit (S$ mn) DBS 3,049 3,732 3,728 UOB 2,865 3,209 3,118 OCBC 2,361 2,760 2,858 Mkt cap / PPOP (x) DBS 13.1 10.7 10.7 UOB 11.2 10.0 10.3 OCBC 14.6 12.5 12.1
2011
2012
2013E
2014E
3,005 2,231 2,250
3,329 2,705 2,775
3,478 2,696 2,640
3,861 3,019 2,867
1.24 1.43 0.65
1.55 1.71 1.12
1.40 1.70 0.74
1.55 1.90 0.81
1.24 1.43 0.66
1.36 1.72 0.80
1.40 1.71 0.76
1.55 1.90 0.83
13.2 14.3 15.4
10.5 11.9 8.9
11.6 12.0 13.4
10.5 10.8 12.4
12.2 13.2 6.0
12.9 14.6 6.7
13.7 15.3 7.0
14.6 16.4 7.4
0.96 0.99 0.89
0.96 1.10 0.97
0.94 1.03 0.86
0.95 1.07 0.86
13.3 14.1 14.3
13.2 15.3 15.5
12.5 13.9 13.5
12.8 14.4 13.7
0.56 0.60 0.30
0.56 0.70 0.33
0.56 0.70 0.33
0.60 0.75 0.33
3,855 3,045 3,067
3,982 3,305 3,834
4,870 3,711 3,556
5,254 4,042 4,038
10.4 10.6 11.2
10.0 9.7 9.0
8.2 8.7 9.7
7.6 8.0 8.5
2008 2009 Cash core profit growth (%) DBS -17.6 -0.1 UOB -9.2 -4.4 OCBC -20.8 16.8 Reported FDEPS growth (%) DBS -15.8 -15.2 UOB -8.8 -4.1 OCBC -16.7 6.5 Cash core FDEPS growth (%) DBS -17.8 -19.6 UOB -8.8 -4.2 OCBC -21.5 13.6 P/E on cash core EPS (x) DBS 15.0 18.6 UOB 16.4 17.1 OCBC 20.9 18.4 P/B (x) DBS 1.47 1.48 UOB 2.29 1.83 OCBC 2.22 1.91 Cash core ROE (%) DBS 10.1 9.1 UOB 12.6 11.9 OCBC 10.4 11.3 P/NTA (x) DBS 2.19 2.02 UOB 3.35 2.44 OCBC 2.93 2.39 Dividend yield (%) DBS 3.4 3.4 UOB 2.9 2.9 OCBC 2.8 2.8 Pre-prov.op.profit growth (%) DBS -1.3 22.4 UOB 9.1 12.0 OCBC 2.6 16.9 Mkt cap / deposits (%) DBS 23.5 21.8 UOB 27.2 26.5 OCBC 36.6 34.2
2010
2011
2012
2013E
2014E
28.8 31.1 27.2
14.7 -5.8 1.4
10.8 21.2 23.3
4.5 -0.3 -4.8
11.0 12.0 8.6
-22.8 42.5 11.5
84.9 -16.1 -0.3
25.0 20.2 72.5
-9.2 -0.6 -33.5
10.1 11.3 8.8
24.8 29.6 22.8
13.1 -7.8 -1.5
10.1 20.0 21.7
3.1 -0.6 -4.8
10.1 11.3 8.6
14.9 13.2 15.0
13.2 14.3 15.2
12.0 11.9 12.5
11.6 12.0 13.1
10.5 10.8 12.1
1.43 1.63 1.78
1.34 1.55 1.66
1.26 1.40 1.50
1.19 1.34 1.44
1.12 1.25 1.34
10.2 13.1 12.4
10.9 11.1 11.4
11.1 12.4 12.7
10.7 11.4 11.3
11.1 12.0 11.6
1.82 2.09 2.27
1.68 1.94 2.06
1.51 1.72 1.80
1.41 1.61 1.71
1.30 1.49 1.57
3.4 3.4 3.0
3.4 2.9 3.0
3.4 3.4 3.3
3.4 3.4 3.3
3.7 3.7 3.3
-0.1 -2.8 3.6
3.4 -2.3 7.3
3.3 8.5 25.0
22.3 12.3 -7.2
7.9 8.9 13.5
20.6 22.6 27.9
17.7 19.0 22.3
16.4 17.7 20.9
14.4 16.1 18.8
13.1 14.6 17.2
Source: Credit Suisse estimates
Singapore Banks Sector
4
12 September 2013
Operational comparison Figure 9: Singapore banks—operational comparison 2008 2009 2010 Net int income growth (%) DBS 4.7 3.6 -3.1 UOB 20.0 2.7 -3.9 OCBC 24.0 1.5 4.3 Fee income growth (%) DBS -12.9 9.4 0.2 UOB -14.3 -10.9 19.1 OCBC -4.2 -5.7 34.7 Non int income growth (%) DBS -15.1 38.5 24.1 UOB -19.5 20.2 14.6 OCBC -17.6 20.9 25.1 Trading income (S$ mn) DBS 23 433 895 UOB -51 331 244 OCBC 43 344 402 Optg expense growth (%) DBS -0.3 -0.2 12.3 UOB 1.6 1.2 8.8 OCBC 10.4 -3.1 25.5 PPOP growth (%) DBS -1.3 22.4 -0.1 UOB 9.1 12.0 -2.8 OCBC 2.6 16.9 3.6 Cash core profit growth (%) DBS -17.6 -0.1 28.8 UOB -9.2 -4.4 31.1 OCBC -20.8 16.8 27.2 Loan growth (%) DBS 16.9 3.9 16.0 UOB 7.9 -0.3 13.1 OCBC 11.8 1.2 29.3 Core RONTA (%) DBS 14.3 12.3 12.8 UOB 17.6 16.6 17.1 OCBC 13.6 14.4 15.7 Loan deposit ratio (x) DBS 74 71 79 UOB 84 82 79 OCBC 85 80 85 NPLs / loans (%) DBS 1.5 2.9 1.9 UOB 2.0 2.2 1.9 OCBC 1.5 1.7 0.9
2011
2012 2013E 2014E
11.7 4.1 15.7
9.5 6.5 9.9
5.6 4.0 2.4
16.3 11.7 8.8
10.4 13.4 15.7
2.4 14.4 5.4
20.0 13.0 9.0
7.0 12.0 10.0
-0.1 -1.5 -3.6
-0.9 17.5 33.3
38.8 17.5 -8.2
-7.8 2.2 13.6
680 190 217
689 231 515
1,244 404 346
880 250 500
12.9 8.5 7.8
9.4 12.2 10.9
8.5 4.6 5.2
7.1 7.0 7.2
3.4 -2.3 7.3
3.3 8.5 25.0
22.3 12.3 -7.2
7.9 8.9 13.5
14.7 -5.8 1.4
10.8 21.2 23.3
4.5 -0.3 -4.8
11.0 12.0 8.6
27.9 25.0 26.9
8.1 8.3 6.6
16.0 14.0 12.0
10.0 8.0 9.0
13.3 14.1 14.3
13.2 15.3 15.5
12.5 13.9 13.5
12.8 14.4 13.7
86 83 86
87 84 86
88 87 87
88 86 87
1.3 1.4 0.9
1.2 1.5 0.8
1.3 1.6 0.9
1.5 1.8 1.1
2008 2009 2010 NIM (%) DBS 2.04 2.02 1.84 UOB 2.27 2.36 2.09 OCBC 2.27 2.23 1.94 Fee income / total revenue (%) DBS 23 22 21 UOB 22 18 22 OCBC 18 16 19 Non int income / total revenue (%) DBS 24 30 35 UOB 27 30 34 OCBC 34 38 42 Revenue growth (%) DBS -0.8 12.0 5.0 UOB 5.9 7.5 1.7 OCBC 5.9 8.1 12.2 Cost-income (%) DBS 46 41 44 UOB 42 39 42 OCBC 44 39 44 PPOP ROE (%) DBS 16.4 19.8 18.5 UOB 18.5 21.4 20.3 OCBC 18.3 20.9 20.5 Core ROA (%) DBS 0.83 0.79 0.97 UOB 1.06 0.98 1.19 OCBC 0.84 0.93 1.05 Core ROE (%) DBS 10.1 9.1 10.2 UOB 12.6 11.9 13.1 OCBC 10.4 11.3 12.4 Cash core RORWA (%) DBS 1.11 1.13 1.46 UOB 1.58 1.68 2.28 OCBC 1.53 1.78 2.16 P&L provisioning (bp of loans) DBS 66 117 63 UOB 82 110 44 OCBC 58 52 14 Loan loss coverage (%) DBS 114 82 100 UOB 111 105 119 OCBC 113 100 119
2011
2012 2013E 2014E
1.77 1.92 1.81
1.72 1.87 1.72
1.67 1.78 1.69
1.73 1.81 1.77
22 24 21
21 25 18
22 26 20
21 27 20
33 33 38
30 35 43
36 38 40
31 36 41
7.6 2.2 7.5
6.1 10.2 18.8
15.7 8.8 -2.1
7.5 8.1 10.7
46 45 44
48 45 41
45 44 44
44 43 43
18.2 19.0 20.8
17.9 19.8 24.6
20.8 21.2 21.6
21.4 22.2 23.3
0.96 0.99 0.89
0.96 1.10 0.97
0.94 1.03 0.86
0.95 1.07 0.86
10.9 11.1 11.4
11.1 12.4 12.7
10.7 11.4 11.3
11.1 12.0 11.6
1.52 1.86 1.93
1.55 2.03 2.15
1.57 1.98 1.99
1.64 2.10 2.04
41 40 18
20 32 19
39 30 18
35 30 24
126 126 107
142 124 142
135 111 118
121 99 100
Source: Company data, Credit Suisse estimates
Singapore Banks Sector
5
12 September 2013
Three key earnings risks in the near to medium term 1H13 was marked by record profits for Singapore banks driven by better-than-expected strength in non-interest income and loan growth across segments. But the macroeconomic environment in the core markets (mainly Singapore+ASEAN+India) for Singapore banks has seen a visible deterioration over the past few months, thereby increasing earnings risks in the near to medium term. While we are unlikely to see significant impact in 2H13, the risks to 2014 earnings expectations have increased. In this section, we look at the three key risks to Singapore banks’ earnings through 2014E.
While we are unlikely to see significant impact in 2H13, there are material risks to 2014 earnings expectations
Loan growth: ASEAN slowdown and Singapore mortgages key risks to growth Singapore banks' overall loan growth has been extremely strong over the past 4–6 quarters given the macro backdrop, helped by a renewed strength in regional trade finance loans and offshore corporate loan bookings in Singapore. But with further downgrades to regional GDP growth estimates and an imminent slowdown in Singapore mortgages, the risks are to the downside in the next few quarters. ASEAN loan growth slowdown imminent Overseas loans have been a major contributor to Singapore banks' loan growth over the past 1–2 years. Relatively, OCBC has seen the biggest contribution from overseas loan growth (49% contribution to growth over the past year) and UOB has seen the least (only 25% contribution). The bulk of the overseas growth has come either from ASEAN (UOB and OCBC) or Greater China (DBS). Figure 10: Region-wise loan growth snapshot As of June 2013 Singapore Hong Kong Malaysia Thailand Indonesia Greater China Other Total loans
DBS 114.6 37.8
41.6 44.4 238.4
As of June 2013 (%) Singapore Hong Kong Malaysia Thailand Indonesia Greater China Other Total loans
S$ bn UOB 113.7 24.4 9.2 5.9 10.0 9.7 172.9
OCBC 82.7 24.7 12.0 20.2 19.2 158.9
Composition DBS UOB OCBC 48% 66% 52% 16% 14% 16% 5% 3% 8% 17% 6% 13% 19% 6% 12% 100% 100% 100%
DBS 3.8 2.8
12.6 3.5 5.0
QoQ (%) UOB 3.4 2.2 -0.6 3.3 11.1 2.2 3.3
OCBC 6.0 3.5 9.1 18.9 3.5 7.0
Growth CAGR (%) DBS 17.2 1.1
47.6 17.9 17.9
2Y UOB 15.2 18.7 14.3 9.3 17.1 3.5 14.8
OCBC 12.3
DBS 17.5 0.7
14.5 23.8 17.4 16.3 14.5
53.8 13.9 16.9
3Y UOB 18.0 21.2 12.9 15.3 27.6 4.8 17.6
OCBC 15.9
DBS 62 -6.0
14.3 24.2 27.7 24.9 18.5
36 8 100
1Y UOB 75 10 6 1 4 5 100
DBS 12.9 -0.9
OCBC 51 16 9 15 10 100
35.7 1.9 11.5
YTD (%) UOB 12.5 4.1 7.5 5.1 8.5 21.9 10.9
OCBC 10.0
DBS 19.3 -4.6
6.9 12.4 16.3 9.1 10.3
% contribution to growth 2Y DBS UOB OCBC 47 67 45 1 17 16 5 2 11 34 6 15 19 2 13 100 100 100
35.0 5.7 14.4
DBS 49 1
34 16 100
YoY (%) UOB 17.9 10.0 16.6 2.2 10.6 14.2 15.4 3Y UOB 67 16 4 3 8 2 100
OCBC 14.3 15.2 17.0 18.2 11.8 14.8
OCBC 47 13 9 17 15 100
Source: Company data, Credit Suisse research
But over the past few months, the sentiment towards ASEAN has turned for the worse and downside risks to near-term GDP growth appear to have increased according to the CS economists: Malaysia: Lower GDP, higher inflation—The government's decision to place greater emphasis on the budget position means that fiscal policy will become less accommodative—with higher fuel prices eroding consumer spending power and postponement of some infrastructure projects capping the overall investment growth. CS Economics team recently cut 2013 GDP growth forecast to 4.4% from 5% earlier and 2014
Singapore Banks Sector
Better fiscal/current a/c positions at the cost of nearterm growth
6
12 September 2013
estimate to 5% from 5.2% earlier—both these numbers are below the consensus expectations. The fuel price hike could immediately add nearly 1% to the headline inflation with some potential second round impact via the increase in transport costs affecting items such as food. We still believe inflation will remain manageable—this hike is well-timed in the sense that it comes when inflation pressure is very low. With the government tightening up the fiscal stance (with negative implications for GDP growth), and inflation pressures likely to remain manageable, even after the fuel price hikes, we doubt the central bank will be in a rush to raise the policy rate this year. This view is strengthened by the fact that it has already issued a series of macro prudential measures to tackle the household leverage issue. Indonesia: Double Trouble—Just as it looked as though Indonesia’s trade deficit may finally be stabilising, August’s data provided a nasty and badly timed surprise. While merchandise export values contracted 6.1% YoY, only marginally worse than market expectations, imports were 10% stronger than consensus at +6.5%, sending the deficit to US$2,310 mn. The latter is comfortably the highest on record. The inflation headline rate rose for a third consecutive month—reaching 8.8% from 8.6%. Having raised rates by 50 bp already, incremental data releases do not reassure the central bank while unsettling the markets once again. In our view, BI still has plenty of work to do to calm things down, which will almost certainly involve adding to the 125 bp of rate hikes delivered to date. We have another 50 bp in the profile. A combination of higher interest rates, softening real income growth and knock-on effects from the investment slowdown is likely to see consumer spending growth soften in the not-too-distant future.
A combination of macro pressures to soften consumer spending growth in the near term
Thailand: Expect further cuts to growth expectations—With the recent set of releases marking a soft start to the anticipated growth recovery in the second half of the year, we recently revised down our 2013 GDP expectation to 2.7% from 4% earlier. As a result of the weaker growth momentum going into 2014, we have also shaved our 2014 GDP growth forecast to 4.5% from 5%. It is important to stress that the main story has not changed significantly—GDP growth being dragged down by soft consumer spending (especially by rural households), delays in investment, while exports will provide a boost to growth momentum in the second half. We expect the consensus as well as the central bank's 2013 GDP growth expectation (4.2%) to be revised down significantly. We believe the BoT has room to cut rate by 25 bp at its next meeting given the downside risk, official growth estimates, benign inflation outlook, and softening credit growth.
We believe the BoT has room to cut rate by 25 bp at its next meeting in October
Figure 11: ASEAN—quarterly GDP growth forecasts (YoY%) 20 SG
MY
TH
ID
15
10
5
0
-5
-10 1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13F
4Q13F
1Q14F
2Q14F
3Q14F
4Q14F
Source: Company data, Credit Suisse estimates
Overall, the economic growth momentum in 2H13 has been below expectations. Coupled with inflation and currency risks, this leaves the central banks with little room for more accommodative action—leaving little room for any positive surprises in 2014.
Singapore Banks Sector
7
12 September 2013
Singapore mortgage loan growth could slow in 2014 Despite several rounds of property market cooling measures employed by the Singapore government, the growth in outstanding overall mortgage loan continues to be steady for Singapore banks led by two drivers: (1) The growth in outstanding loans is being driven by drawdown on mortgage loans booked earlier (driven by record primary market sales), and (2) Some of the slowdown in Singapore mortgages is being compensated by a more aggressive approach to mortgages in regional markets (except DBS). Figure 12: Industry-wise loan growth snapshot As of June 2013 Cons. + hsg loans Consumer Housing Business loans Manufacturing Bldg / constn Gen commerce Trans/ commn Fin instns Others Total loans
DBS 64.2 17.0 47.2 174.2 32.6 40.2 48.2 19.8 10.0 23.4 238.4
Mar-13 (S$ bn) UOB OCBC 73.1 56.3 24.2 15.9 49.0 40.5 99.8 102.6 16.1 9.3 21.5 23.7 21.2 23.0 7.6 10.9 26.2 22.4 7.3 13.3 172.9 158.9
As of June 2013 (%)
DBS 27% 7% 20% 73% 14% 17% 20% 8% 4% 10% 100%
Composition UOB OCBC 42% 35% 14% 10% 28% 25% 58% 65% 9% 6% 12% 15% 12% 14% 4% 7% 15% 14% 4% 8% 100% 100%
DBS 3.6 9.7 1.5 5.6 3.7 8.3 4.5 13.0 -4.4 4.5 5.0
QoQ (%) UOB 2.6 4.0 1.9 3.9 0.2 2.5 5.0 8.0 8.1 -4.9 3.3
DBS 23 9 14 77 17 18 37 4 -2 4 100
1Y UOB 43 17 26 57 20 11 13 0 13 1 100
Growth CAGR (%) DBS 11.2 16.5 9.5 20.7 20.3 27.9 43.1 11.5 -21.3 17.7 17.9
Cons. + hsg loans Consumer Housing Business loans Manufacturing Bldg / constn Gen commerce Trans/ commn Fin instns Others Total loans
2Y UOB 17.6 22.0 15.6 12.8 29.6 22.7 9.7 5.7 8.4 -3.7 14.8
OCBC 17.0 13.9 18.2 13.2 11.0 14.7 15.1 19.6 10.6 9.2 14.5
DBS 10.5 17.5 8.4 19.7 20.9 25.6 48.3 14.2 -21.0 17.1 16.9
3Y UOB 18.1 20.2 17.1 17.2 24.1 21.9 14.5 8.1 21.6 1.5 17.6
OCBC 17.6 16.1 18.2 19.0 12.9 14.1 29.9 22.0 27.3 6.3 18.5
OCBC 8.1 11.1 7.0 11.5 13.4 5.7 31.5 19.4 -0.2 8.1 10.3
DBS 11.9 18.8 9.6 15.3 18.3 15.8 29.4 6.1 -6.0 5.1 14.4
YoY (%) UOB 15.6 19.2 13.9 15.3 39.6 13.3 16.8 -0.4 12.8 2.2 15.4
OCBC 15.9 16.3 15.7 14.3 10.8 11.7 25.7 18.5 12.5 4.3 14.8
% contribution to growth 2Y DBS UOB OCBC 18 49 40 7 19 10 12 30 31 82 51 60 15 16 5 23 17 15 37 9 15 6 2 9 -9 9 11 10 -1 6 100 100 100
DBS 19 7 11 81 16 22 37 7 -11 10 100
3Y UOB 43 15 28 57 12 14 11 2 17 0 100
OCBC 34 9 25 66 4 12 20 8 18 4 100
OCBC 3.4 5.6 2.5 9.1 7.5 4.3 22.4 8.4 4.7 7.0 7.0
OCBC 38 11 27 62 4 12 23 8 12 3 100
DBS 6.0 13.5 3.6 13.6 20.4 11.1 26.2 11.7 -10.6 2.2 11.5
YTD (%) UOB 6.7 8.0 6.1 14.2 36.0 10.4 13.6 10.2 10.4 6.4 10.9
Source: Company data, Credit Suisse research
But as the primary and secondary market transaction volumes in Singapore continue to slow, the pace of mortgage loan growth is bound to slow in 2014. The charts below illustrate the lag effect between property transaction volumes and loan growth. Figure 13: Residential primary sales ('000) versus system
Figure 14: Primary sales ('000) versus total property
mortgage loan growth (YoY%)
related (mortgage + construction) loan growth (YoY%)
7.0
Primary sales ('000)
25
Mortgage loans YoY%
7.0
Primary sales ('000)
30
Total Property related loans YoY%
6.0
6.0
25
20 5.0
5.0 15
4.0
20
4.0 15
3.0
10
3.0 10
2.0
2.0 5
5
1.0
1.0 0.0
0 2Q97
2Q99
2Q01
2Q03
2Q05
2Q07
Source: Company data, Credit Suisse research
Singapore Banks Sector
2Q09
2Q11
2Q13
0.0
0
2Q97
2Q99
2Q01
2Q03
2Q05
2Q07
2Q09
2Q11
2Q13
Source: Company data, Credit Suisse research
8
12 September 2013
USD / trade finance growth could remain volatile USD loan growth has been a key factor in the better-than-expected loan growth for Singapore banks, primarily driven by the strength in trade finance loans. DBS has seen the biggest growth contribution from trade finance loans and UOB the least. But as witnessed during mid-2012, the short-term trade finance loan growth tends to be volatile and more correlated to the trade flows. As a result, it will not be surprising to see a sudden slowdown or a shrinkage in the trade finance loan portfolio if the economic growth surprises on the downside. Figure 15: Currency-wise loan growth snapshot As of June 2013 DBS 97.8 80.1 0.0 28.8
SGD USD MYR HKD THB Others Total
31.7 238.4
As of June 2013 (%)
S$ bn UOB 97.8 22.5 22.8
OCBC 73.3 40.1 19.8
4.8 24.9 172.9
25.6 158.9
Composition DBS UOB OCBC 41% 57% 46% 34% 13% 25% 0% 13% 12% 12% 3% 13% 14% 16% 100% 100% 100%
DBS 2.8 8.3 0.0 -1.3 10.2 5.0
QoQ (%) UOB 1.8 11.4 2.1
OCBC 3.1 15.2 3.9
DBS 8.0 19.3 0.0 -2.1
3.7 6.8 3.3
9.3 7.0
18.5 11.5
Growth CAGR (%) DBS 16.3 27.5 0.0 -1.0
SGD USD MYR HKD THB Others Total
24.5 17.9
2Y UOB 15.6 12.9 18.9
OCBC 12.0 17.9 13.5
DBS 17.1 30.1 0.0 -4.5
-14.9 9.2 14.8
17.6 14.5
18.8 16.9
3Y UOB 17.1 17.3 20.9
OCBC 14.7 32.5 10.9
DBS 45 48 0 -5
-7.8 21.1 17.6
19.3 18.5
11 100
1Y UOB 65 14 10
OCBC 39 31 12
-12 5 100
17 100
YTD (%) UOB 11.5 24.0 4.5
OCBC 4.6 26.6 7.7
DBS 16.1 22.1 0.0 -5.1
-40.2 5.5 10.9
7.6 10.3
12.1 14.4
% contribution to growth 2Y DBS UOB OCBC 38 59 40 46 12 30 0 16 12 -1 -4 17 6 19 100 100 100
YoY (%) UOB 18.0 17.2 11.7
OCBC 12.4 19.2 14.8
-35.8 7.9 15.4
15.4 14.8
3Y UOB 55 13 15
OCBC 39 36 8
-2 11 100
17 100
DBS 41 49 0 -5 14 100
Source: Company data, Credit Suisse research
Given the rapid pace of growth in the past few years, trade finance and USD loans have significantly increased their share of the loan book. As a result, volatility in USD/trade finance loan growth could now more impact overall loan growth. While DBS has almost doubled the share of USD and trade finance loans since 2006, UOB has surprisingly brought down the share of USD and trade finance loans marginally since 2006. As a result, while DBS remains the most prone to volatility in trade finance loan growth, UOB’s loan growth could be relatively less volatile. Figure 16: General commerce as % of total loans 25
2006
2008
Figure 17: US$ denominated as % of total loans
2011
2Q13
2006
20
2008
2011
2Q13
34
35 31
20
30
17 15
15
15
40
13 12 12 10 10
25 20
10
10
14
9
26
25
22 18
16 16
15
14 13
13 13
10
5
5 0
0 DBS
UOB
Source: Company data, Credit Suisse research
Singapore Banks Sector
OCBC
DBS
UOB
OCBC
Source: Company data, Credit Suisse research
9
12 September 2013
Margins: False bottom? Much of the earnings optimism around Singapore banks post the 2Q13 results has been driven by the guidance from banks that NIMs are now probably closer to their cyclical bottom and could probably start improving in FY14. This view has been further supported by the recent spikes in longer-term government bond yields, which in theory should help banks’ NIMs improve going forward. But looking at the underlying drivers in various markets, we believe the consensus might be getting too bullish about FY14 NIM prospects. ASEAN NIMs to remain under pressure near term The primary driver behind an improvement in Group NIMs could be a much better loan growth profile in regional markets relative to Singapore (which is the lowest NIM market for Singapore banks). But as discussed earlier, given the increasing macro risks in the region, regional loan growth is unlikely to be much superior (partly market driven, but mostly due to banks' conservative approach) in the next few quarters. Moreover, the NIM pressure in the regional markets could potentially experience further pressure in the near term. Malaysia: Singapore banks are guiding that the pricing environment seems to be improving but funding pressure is still prominent. According to the CS Malaysian banks’ analyst Danny Goh, most of the Malaysian local banks expect less NIM compression in 2H13 as funding cost pressure has eased and loan pricing competition has not intensified further. Moreover, banks seem more focused on preserving credit quality and NIMs. With market leaders adopting risk-based pricing, we expect more rational pricing among industry players. Overall, while NIM compression is expected to subside, we are unlikely to see an expansion anytime soon.
Indonesia and Thailand NIMs could continue to compress near term
Indonesia: NIM pressure expected to continue with a squeeze on both asset pricing and funding costs. Singapore banks, with their already high LDRs, are most likely to see further NIM pressure in the next few quarters. Higher policy rates might provide some cushion but tighter funding competition might erode the advantage. Thailand: UOB expects some further NIM pressure in the near term, driven by tighter funding competition and its targeted higher pace of loan growth. Policy rate cuts might prove to be a further dampener on the prospects for a NIM recovery. Figure 18: Malaysia geographical NIMs (%)
Figure 19: Indonesia geographical NIMs (%) 7.0
3.3 UOB
OCBC
3.1
UOB
OCBC
6.5
2.9
6.0
2.7 5.5
2.5
5.0
2.3
2.1
4.5
1.9 4.0
1.7
3.5
1.5 2Q08
2Q09
2Q10
2Q11
Source: Company data, Credit Suisse research
Singapore Banks Sector
2Q12
2Q13
2Q08
2Q09
2Q10
2Q11
2Q12
2Q13
Source: Company data, Credit Suisse research
10
12 September 2013
SGD liquidity concerns becoming more critical to NIM expectations Given the lowering growth expectations for Singapore banks' regional operations, the trajectory of Singapore geographical NIMs might become more critical to determine the NIM trajectory over the next few quarters. The NIM pressure witnessed in Singapore (driven by mortgage repricing, trade finance and tighter corporate loan pricing) has been partly cushioned by the increasing Singapore dollar LDRs. But with Singapore dollar LDRs (especially UOB and OCBC) already at above optimal levels, we are unlikely to see further support from stretching LDRs. This might mean UOB and OCBC might have to compete more aggressively for SGD deposits.
UOB and OCBC might have to compete more aggressively for SGD deposits
Figure 20: UOB Singapore NIMs (%)
Figure 21: Singapore dollar (S$) loan-deposit ratio (%)
2.2
100
2.0
90
4Q07
4Q09
4Q10
4Q12
2Q13
95 86 81
1.8
80
1.6
70
1.4
60
77
82
85 84
79
69 70 60 55
51 1.2
50
1.0
2Q08
2Q09
2Q10
2Q11
2Q12
2Q13
Source: Company data, Credit Suisse research
40 DBS S$
UOB S$
OCBC S$
Source: Company data, Credit Suisse research
Trade finance growth and USD liquidity remains a minor risk While the aggressive growth in trade finance loans has been a major contributor to Singapore banks' NIM compression, the relative stability of Singapore banks NIMs in their trade finance exposure has been helped by a relatively stable USD short-term funding market with Singapore banks having an advantage in both short-term funding rates and SGD-USD swap rates. Any stress in the USD funding markets or even more normalisation could be negative for Singapore bank NIMs in their trade finance book. Figure 22: US dollar (US$) loan-deposit ratio (%) 180
4Q07
4Q09
4Q10
Figure 23: Trade finance as % of total loans
4Q12
2Q13
25
2006
161 160
2011
2Q13
20 20
146
17
140
127
120
116
112
101 100
2008
90
90
80
99
95 80 83
89
101
15
15
15
14
13 12 12 10 10
10
10
9
82
5 60
0
40 DBS US$
UOB US$
Source: Company data, Credit Suisse research
Singapore Banks Sector
OCBC US$
DBS
UOB
OCBC
Source: Company data, Credit Suisse research
11
12 September 2013
Credit costs: Normalisation or shock? After witnessing a continuous improvement in the overall asset quality environment since 2010 with historical low credit costs (both primarily helped by low interest rates), we have probably seen the bottom for this cycle in terms of credit costs. Singapore banks’ managements now expect a normalisation in credit costs going into 2014. Given the historic low net interest margins, profit sensitivity to higher credit costs is now probably higher than previous cycles. How different is this cycle? To determine the potential average credit costs through this cycle, we need to assess the different drivers through this cycle—mainly interest rates, credit growth and relative provisioning levels. Rates: Historic low interest levels are probably the most important differentiating factor in this cycle. In almost all previous instances of a turn in asset quality cycle, interest rates were at a much elevated level. This has two implications when determining the potential spike in credit when the cycle turns: (1) Borrowers are at a much better position in a low rate environment to service their loans (through higher interest coverage ratios), (2) But the net interest margins in a low rate environment are potentially very low and have much lower cushion to absorb a spike in credit costs.
Historical low rates should help cushion a big spike in credit costs in the near term
Figure 24: Three-month SIBOR and LIBOR (%) 8.0 SIBOR
LIBOR
7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 Dec-99
Dec-01
Dec-03
Dec-05
Dec-07
Dec-09
Dec-11
Source: Bloomberg, Credit Suisse research
Credit growth: The pace of credit through the cycle is a good indicator of the level of risk built up in the system. Through cycle, since circa 2010, the pace of credit growth for Singapore banks have reached unprecedented levels, partly driven by property related loan growth and aggressive opportunistic growth into the USD trade finance segment.
The current cycle has been characterised by the rapid rise in offshore and USD exposure
An interesting through different cycles is the increasing pace of credit growth, with the current cycle seeing a much faster pace of growth. This trend is partly driven by the expansion of Singapore banks into regional markets. While during 2004–09 Singapore banks started expanding aggressively into regional ASEAN markets, the current cycle (starting 2010) has been characterised by the rapid rise in offshore and USD exposure. The Singapore banking system’s leverage (as % of GDP) has also reached unprecedented levels during this cycle.
Singapore Banks Sector
12
12 September 2013
Figure 25: Loan growth CAGR (%) through cycles
Figure 26: Singapore system loans / GDP (%)
25
300
'95-'99
'01-'04
'05-'09
'09-1H13
DBU loans / GDP
20.7 20
DBU+ACU loans / GDP
250
18.0 16.4
15
200
13.3 9.9
9.5
10
9.5
150
4.7
5
100
3.2
1.9
0.8
0.2 0
DBS
UOB
50
OCBC
Source: Company data, Credit Suisse research
4Q00
4Q02
4Q04
4Q06
4Q08
4Q10
4Q12
Source: CEIC, Credit Suisse research
Credit costs: The amount of discretionary loan loss provisions set aside by banks through the early stages of the cycle could help us gauge the relative risk of a credit cost shock when the cycle turns. On a relative basis, DBS and UOB appear to have been more proactive with a higher level of discretionary provisioning through this cycle. While this does not necessarily result in lower potential credit costs later in the cycle, it provides a cushion during the normalisation process. Figure 27: Average SP+GP on loans (bp) 140 120
'95-'99
'00-'04
'05-'09
'10-1H13
Figure 28: Average total credit costs (bp) 140
132
116
120
'95-'99
'00-'04
100
80
80
'10-1H13
132
117
102 100
'05-'09
96
63 60 40
47 35
39
46 34
60
50 34
49
55
54 44
36
40
31
24 20
11
0
16
20
13
0 DBS
UOB
Source: Company data, Credit Suisse research
OCBC
DBS
UOB
OCBC
Source: Company data, Credit Suisse research
Overall, normalisation has started but a shock unlikely in the near term While the pace and nature of overseas loan growth through this cycle suggests that a normalisation in credit costs is imminent, we do not expect a credit cost shock in the near term due to two key reasons: (1) Interest rates are expected to remain at record low levels in most regional markets, providing a critical cushion in terms of better coverage levels for borrowers (2) Majority of the incremental credit growth through this cycle has been driven by collateralised lending, which in theory should see lower through cycle credit costs
Singapore Banks Sector
13
12 September 2013
Assessing downside risks to 2014 earnings expectations In this section, we assess the downside risks to Singapore banks' earnings expectations for 2014E under two scenarios: Normalisation: Under this scenario, growth in Singapore and regional markets is mildly slower than our base case expectations. While the underlying credit costs start to normalise, there are no macro events (interest rate spikes, recession, currency market stress etc.) to warrant a sudden spike in credit costs. While loan growth sees a mild slowdown, net interest margins remain flat (versus base expectation of a mild recovery). Stressed: Under this scenario, growth in Singapore and regional markets witness a sudden and sharper-than-expected slowdown. Credit costs could potentially see a spike, also driven by other macro shocks. Loan growth slows down significantly and net interest margins see further compression (led by tighter liquidity and end of cheap USD funding).
Loan growth: A potential slowdown, but unlikely to see a big divergence Downside risks to 2014 loan growth expectations could mainly arise from slower overseas loan growth, partly driven by an overall macro slowdown and partly by a more conservative approach to overseas growth from Singapore banks. Figure 29: Region-wise loan growth snapshot As of June 2013 Singapore Hong Kong Malaysia Thailand Indonesia Greater China Other Total loans
DBS 114.6 37.8
41.6 44.4 238.4
As of June 2013 (%) Singapore Hong Kong Malaysia Thailand Indonesia Greater China Other Total loans
S$ bn UOB 113.7 24.4 9.2 5.9 10.0 9.7 172.9
OCBC 82.7 24.7 12.0 20.2 19.2 158.9
Composition DBS UOB OCBC 48% 66% 52% 16% 14% 16% 5% 3% 8% 17% 6% 13% 19% 6% 12% 100% 100% 100%
DBS 3.8 2.8
12.6 3.5 5.0
QoQ (%) UOB 3.4 2.2 -0.6 3.3 11.1 2.2 3.3
OCBC 6.0 3.5 9.1 18.9 3.5 7.0
Growth CAGR (%) DBS 17.2 1.1
47.6 17.9 17.9
2Y UOB 15.2 18.7 14.3 9.3 17.1 3.5 14.8
OCBC 12.3
DBS 17.5 0.7
14.5 23.8 17.4 16.3 14.5
53.8 13.9 16.9
3Y UOB 18.0 21.2 12.9 15.3 27.6 4.8 17.6
OCBC 15.9
DBS 62 -6.0
14.3 24.2 27.7 24.9 18.5
36 8 100
1Y UOB 75 10 6 1 4 5 100
DBS 12.9 -0.9
OCBC 51 16 9 15 10 100
35.7 1.9 11.5
YTD (%) UOB 12.5 4.1 7.5 5.1 8.5 21.9 10.9
OCBC 10.0
DBS 19.3 -4.6
6.9 12.4 16.3 9.1 10.3
% contribution to growth 2Y DBS UOB OCBC 47 67 45 1 17 16 5 2 11 34 6 15 19 2 13 100 100 100
35.0 5.7 14.4
DBS 49 1
34 16 100
YoY (%) UOB 17.9 10.0 16.6 2.2 10.6 14.2 15.4 3Y UOB 67 16 4 3 8 2 100
OCBC 14.3 15.2 17.0 18.2 11.8 14.8
OCBC 47 13 9 17 15 100
Source: Company data, Credit Suisse research
In the table below we lay out our bottom-up loan growth assumptions for Singapore banks under various scenarios. DBS: The key source of risk to loan growth is a significant slowdown in offshore loan demand, especially in Greater China. But the probability of a significant slowdown has been decreasing given the increasingly positive macro news flow from Greater China.
Every 5% change in loan growth could have only a 1–2% earnings impact
UOB: The probability of a slowdown in ASEAN regional loan growth is now higher with increasing macro risks in the region. While the overall market growth might slow down, UOB in typical fashion could turn more conservative towards growth resulting in a slower-than-market growth. OCBC: OCBC has been the biggest beneficiary of overseas loan growth this cycle and as a result is the most prone to a slowdown in overseas loan growth.
Singapore Banks Sector
14
12 September 2013
Overall, the key drivers of a slowdown in loan growth could be overseas markets—ASEAN (UOB, OCBC), Greater China (OCBC) and India (DBS, if management decides to shrink loan book significantly). But the probability of a Greater China-driven slowdown appears increasingly unlikely—lowering the downside risks for DBS significantly. As a result, UOB and OCBC are probably at a higher risk of an ASEAN-driven slowdown. Figure 30: Regional loan growth assumptions Base case (2014E) (YoY%) Singapore Hong Kong Malaysia Thailand Indonesia Greater China Other Group loans
Normalised
UOB and OCBC are probably at a higher risk of an ASEAN driven slowdown
Stressed
DBS
UOB
OCBC
DBS
UOB
OCBC
DBS
UOB
OCBC
9.0 8.0
8.0
9.0
7.0 5.0
6.0
6.0
4.0 2.0
4.0
4.0
10.0
8.0 8.0
10.0 8.0 5.0
4.0 5.0
5.0 5.0 6.0 2.0 2.0
6.0
12.0 10.0 5.0
7.0 8.0 8.0 5.0 2.0
8.0
15.0 10.0
8.0 12.0 12.0 8.0 2.0
10.0
8.0
9.0
7.0
6.0
6.7
3.9
4.0
4.2
6.0 4.0 2.0
Source: Credit Suisse estimates
Importantly, loan growth in itself is not a big driver of bank earnings. As a result, even if there is a divergence in overall loan growth (assuming NIMs remain flat), it is unlikely in itself to drive a big variance in earnings growth expectations. Figure 31: Loan growth scenarios for 2014E (YoY%) 12.0
10.0
8.0
Base
Normalised
Figure 32: Impact on profit growth expectations (%) DBS
Stressed
UOB
OCBC
0.0
10.0
-0.2 9.0
-0.4
8.0
-0.6
7.0
6.7
-0.8
6.0
6.0
-0.8
-1.0
4.0
4.2
4.0
3.9
-1.2
-0.8
-1.0 -1.2
-1.4
-1.3
-1.6
2.0
-1.8 0.0 DBS
Source: Credit Suisse estimates
Singapore Banks Sector
UOB
OCBC
-2.0
-1.8
Normalised
Stressed
Source: Credit Suisse estimates
15
12 September 2013
Margins: Performance can potentially diverge in 2014 Stretched SGD (UOB) and USD (DBS and to some extent OCBC) balance sheet pose the key risks to margins going into 2014. Any short-term stress in the USD short-term funding markets (which in the past few quarter have been extremely benign for Singapore banks) and/or a sustained deposit competition for SGD deposits could adversely affect any chances of a recovery in NIMs. Funding costs will remain key to NIMs as we are yet to see an improvement in pricing power of banks. Figure 33: Singapore dollar (S$) loan-deposit ratio (%)
Figure 34: US dollar (US$) loan-deposit ratio (%)
100
180
4Q07
4Q09
4Q10
4Q12
2Q13
95
4Q07
4Q09
4Q10
4Q12
2Q13
161
90
86 81 77
80
82
85 84
127
120
55
116
112
101 100
60
60
146
140
79
69 70
70
160
90
80 83
80
101
99
95
90
89
82
51 50
60 40
40 DBS S$
UOB S$
DBS US$
OCBC S$
Source: Company data, Credit Suisse research
UOB US$
OCBC US$
Source: Company data, Credit Suisse research
Base case scenario: Funding markets remain stable and banks pricing power gradually increase in 2014E. Better overseas growth and lengthening of securities book tenure also contributes to a gradual recovery in NIMs.
Every 5 bp change in NIMs could have a 2-3% earnings impact
Normalisation scenario: Any improvement in pricing power is mostly offset by an increase in funding cost for banks, resulting in a further delay in NIM recovery. Stressed scenario: While loan pricing continues to remain under pressure, the tightening liquidity conditions result in a sustained increase in funding costs (both SGD and USD) which further results in NIM compression through 2014. Figure 35: NIM scenarios for 2014E (bp change YoY) 6
Base
5
Normalised
Stressed
4
4
Figure 36: Impact on profit growth expectations (%) 0
4 -1
2 0
0
0
0
-2
-2
-2
-2
-2
-3
-4
-4 -5
-6
-4 -5
-8 -8
-5
-8
-10
Normalised
-6 DBS
Source: Credit Suisse estimates
Singapore Banks Sector
UOB
OCBC
DBS
UOB
-5
Stressed OCBC
Source: Credit Suisse estimates
16
12 September 2013
Credit costs: Just 'normalisation' could impact OCBC more While it is difficult to ascertain the relative quality of the loan books, the through cycle credit costs for banks generally tend to normalise towards their previous cycle averages. Based on previous cycle performance (excluding exceptional stress during the 1997 Asian financial crisis), the through cycle average credit cost for banks tend to average 35–45 bp on loans and 40–50 bp overall (including other securities). While DBS and UOB's performances were close to the through cycle average expectations during 2005–09, OCBC surprised the market with a much superior performance. It is difficult to assess at this stage whether OCBC might be able to repeat its superior relative performance through this cycle. But so far during this cycle, it has been the least conservative in terms of general provisioning (partly justified by more collateralised lending). Even if OCBC sees just a normalisation towards previous cycle averages, it could see a bigger earnings risk. Figure 37: Average SP+GP on loans (bp) 140 120
'95-'99
'00-'04
'05-'09
'10-1H13
Can OCBC repeat previous cycle's stellar performance?
Figure 38: Average total credit costs (bp) 140
132
116
120
'95-'99
'00-'04
100
80
80
60
60
'10-1H13
132
117
102 100
'05-'09
96
63
40
47 35
50
46
39
34
34
55
54
49
44
36
40
31
24 20
11
16
20
0
13
0 DBS
UOB
OCBC
DBS
Source: Company data, Credit Suisse research
UOB
OCBC
Source: Company data, Credit Suisse research
Credit cost performance of regional banking sectors critical Figure 39: Average sector credit costs (bp of loans) (CS universe) 200
Avg 2005-2010
186
2012
2013E
2014E
180 160 140 120
102
100
85
80
83
91
66
75
76
60 40
23
17
20
23
27
0 Indonesia
Malaysia
Thailand
Source: Credit Suisse estimates
As discussed earlier, higher overseas contribution has been a key driver behind the betterthan-expected loan growth performance through this cycle. While Singapore banks in
Singapore Banks Sector
17
12 September 2013
general have superior and more stringent risk criteria compared to local banks in overseas markets, they cannot be immune to an overall deterioration in asset quality in the sector. OCBC has higher earnings risk even under a 'normalisation' scenario Base case scenario: There are no unforeseen credit events—2014E credit costs see only a slight increase compared to 2012–13E.
Every 5 bp change in credit costs could have a ~3% earnings impact
Normalisation scenario: NPLs continue to see a gradual and steady increase resulting in credit costs creeping towards previous cycle sector average at 40 bp levels. Stressed scenario: Regional economies see a significant slowdown in growth, with stress from interest rate or foreign exchange rate volatility. Under such a scenario, credit costs could witness a spike above historical averages. We assume an average 60 bp credit cost under this scenario (not overly aggressive in our view). Figure 40: Credit cost scenarios for 2014E (bp of loans) Base
70
Normalised
60
60
Figure 41: Impact on profit growth expectations (%)
Stressed
0
60
60
-2 -4
50
-3
-6 40
40
40
40
-8
35
-8
-10
30
30
-5
-12
24
-14
20
-16 10
-15
-15
-18 Normalised
-20
0 DBS
UOB
DBS
OCBC
Source: Credit Suisse estimates
-18
Stressed
UOB
OCBC
Source: Credit Suisse estimates
Non-interest income: The other key risk DBS (trading income) and OCBC (trading and insurance incomes) are the most exposed to the volatile capital market related revenue streams. Figure 42: Fee income as % of revenue
Figure 43: Trading income as % of revenue
30
18
DBS
28 26
OCBC
26 23 22
UOB
17
OCBC
21
20
18
22
22
21
19
18
21
21
12
12
0 2009
2010
2011
Source: Company data, Credit Suisse research
Singapore Banks Sector
8
2012
1H13
-2
1
2007
8
5 3 0
8
6
4 2
9
8
4 2
2008
7
6
14
2007
9
10 8
18
16
16
13
14 23
22
18
26
25
24
20
10
DBS
16
24
22
UOB
28
4
4
5
1
-1 2008
2009
2010
2011
2012
1H13
Source: Company data, Credit Suisse research
18
12 September 2013
Stress testing valuations: OCBC looks relatively stretched In this section, we analyse relative valuations and stress test them for our risk scenarios. Overall, OCBC’s valuations appear the most stretched relative to peers and at most risk of a correction if our risk scenarios pan out.
DBS’ ROEs start to converge with peers, but valuation discounts persist While DBS’ ROEs appear to sustainably closing in on peers, the P/B discounts continue to persist, especially relative to OCBC. Figure 44: Core ROE (%)
Figure 45: Trailing P/B (x)
18 DBS ROE
UOB ROE
2.5
OCBC ROE
DBS
16
UOB
OCBC
2.1
14 1.7
12 10
1.3
8 0.9
6 4 Dec/01
Dec/03
Dec/05
Dec/07
Dec/09
Dec/11
Dec/13
Source: Credit Suisse estimates
0.5 Dec/01
Dec/03
Dec/05
Dec/07
Dec/09
Dec/11
Dec/13
Source: Credit Suisse estimates
OCBC’s relative valuations appear stretched OCBC versus DBS: On a relative P/B basis, OCBC's premium is still close to historical average levels. If adjusted for ROEs, OCBC's relative P/B premium continues to be much higher than historical averages. Figure 46: OCBC vs DBS—relative P/B (x)
Figure 47: OCBC vs DBS—relative P/B-ROE adjusted (%) 60%
1.5
OCBC/DBS PB-ROE
1.4
5Y avg
40%
1.3
20% 1.2 1.1
0%
1.0
-20%
0.9
-40%
0.8
0.7 Dec/01
-60% Dec/03
Dec/05
Dec/07
OCBC / DBS P/B
Source: Credit Suisse estimates
Singapore Banks Sector
Dec/09 5Y avg
Dec/11
Dec/13
-80% Dec/01
Dec/03
Dec/05
Dec/07
Dec/09
Dec/11
Source: Credit Suisse estimates
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12 September 2013
OCBC versus UOB—OCBC's relative P/B premium versus UOB continues to be close to historic highs. If adjusted for relative ROEs, OCBC’s P/B premium continues to be above historical averages. Figure 48: OCBC vs UOB—relative P/B (x)
Figure 49: OCBC vs UOB—relative P/B-ROE adjusted (%)
1.2
60%
1.2
50%
1.1
40%
1.1
5Y avg
30%
1.0
20%
1.0
10%
0.9
0%
0.9 0.8
-10%
0.8
-20%
0.7 Dec/01
OCBC/UOB PB-ROE
Dec/03
Dec/05
Dec/07
OCBC / UOB P/B
Dec/09
Dec/11
Dec/13
-30% -40% Dec/01
5Y avg
Source: Credit Suisse estimates
Dec/03
Dec/05
Dec/07
Dec/09
Dec/11
Source: Credit Suisse estimates
P/PPOP is a better reflection of the core earnings multiples in the current environment Given the stage of the asset quality cycle and the lack of clarity in terms of incremental loan loss provisioning required through the rest of the cycle, pre-provision operating profit (PPOP) gives a better reflection of the core earnings momentum. Looking at P/PPOP multiples might be a better way of gauging the relative core earnings multiples. OCBC continues to trade at a significant premium to peers and much above historic average levels. Figure 50: OCBC vs DBS – relative P/PPOP (x)
Figure 51: OCBC vs UOB – relative P/PPOP (x)
1.8
1.3
1.6
1.2
1.4
1.1
1.2
1.0
1.0
0.9
0.8
0.8
0.6 Dec/01
OCBC continues to trade at a significant premium to peers and much above historical average levels
Dec/03
Dec/05
Dec/07
OCBC / DBS P/PPOP
Source: Credit Suisse estimates
Singapore Banks Sector
Dec/09 5Y avg
Dec/11
Dec/13
0.7 Dec/01
Dec/03
Dec/05
Dec/07
OCBC / UOB P/PPOP
Dec/09
Dec/11
Dec/13
5Y avg
Source: Credit Suisse estimates
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12 September 2013
Relative to Singapore market: P/B-ROE relative valuations appear attractive Using our Credit Suisse GEM strategist Sakthi Siva's P/B-ROE relative model for Singapore banks relative to the Singapore market, all three Singapore banks look attractive compared to their historical average discounts. On a relative basis, DBS appears the most attractive both in terms of the absolute discount levels and relative to historic average. Interestingly, Singapore banks in general have traded at a discount to the overall market over the past three years despite a stronger-than-expected earnings momentum and improving profitability levels. Figure 52: P/B-ROE relative to Singapore market (%)
Figure 53: P/B-ROE relative to Singapore market (%) DBS
60% DBS
UOB
UOB
OCBC
0
OCBC
-0.2
40%
-5
20%
-3.7 -6.1
0%
-10
-20% -15
-40% -20
-60% -80% Dec-00
Dec-02
Dec-04
Dec-06
Dec-08
Dec-10
Dec-12
Source: Credit Suisse research
-25
-19.9 -23.1
-19.4 Current
Average
Source: Credit Suisse research
Relative to the NJA banks: Valuation premiums close to historical highs On trailing P/B (1.2x), while the Singapore banks sector is now trading close to 1 sd below historical average, their premium to the overall NJA banks sector is close to historical highs. Figure 54: Singapore banks MSCI trailing P/B (x)
Figure 55: Relative to NJA banks (x)
2.30
1.2
2.10 1.1 1.90
1.70
1.0
1.50 0.9 1.30 1.10
0.8
0.90 0.7 0.70 0.50 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12
0.6 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12
Source: Datastream
Source: Credit Suisse research
Singapore Banks Sector
21
12 September 2013
Similarly, looking at 12-month forward P/E (11.0x), while the Singapore banks sector are trading close to 1 sd below their historical average, their premium to the overall NJA banks sector is close to historic highs. Figure 56: Singapore banks MSCI 12 month P/E (x)
Figure 57: Relative to NJA banks (x)
19.0
1.6
17.0
1.5 1.4
15.0
1.3 13.0
1.2 11.0 1.1 9.0
1.0
7.0
0.9
5.0 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12
0.8 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12
Source: Datastream
Source: Credit Suisse research
OCBC's market implied ROEs are higher than our near-term expectations Using a cost of equity of 9.5% and terminal growth rate of 3.5%, we calculate the market implied ROEs for the Singapore bank stocks and compare it with our base case 2014 ROE expectations—while DBS and UOB’s market implied ROEs are below our base case estimates, OCBC’s market implied ROEs continue to be above our base case. Figure 58: Market implied ROE versus historical average
Figure 59: CS core ROE (%)
and CS 2014E expectations (%) 12.5
Market implied ROE
2011-1H13 avg ROE
CS ROE 2014
DBS ROE
12.2 12.0
12.0
UOB ROE
OCBC ROE
16
12.0
14
11.7 11.5
11.5
18
11.4
11.1 11.1
12 10
11.0 10.7
8
10.5
6
10.0
DBS
Source: Credit Suisse estimates
Singapore Banks Sector
UOB
OCBC
4 Dec/01
Dec/03
Dec/05
Dec/07
Dec/09
Dec/11
Dec/13
Source: Credit Suisse estimates
22
12 September 2013
DBS remains our top pick in the sector The tables below summarise the implied ROEs and P/B multiples under various scenarios. Based on our estimates, DBS has the most potential for upside—as P/B multiples play catch-up with the sustainable improvement in ROEs and relatively lower downside risks under the normalised or stressed scenarios through 2014E. OCBC’s valuations, on the other hand, are already rich and potentially have more downside if one of our risk scenarios play out. UOB remains a defensive play in this environment with valuation levels close to warranted levels. DBS remains our top pick in the sector. Figure 60: 2014E ROE (%) 14.0 12.0
Market implied ROE
10.7
11.1
Figure 61: P/B (x)
CS ROE 2014
11.5
12.0
CS target
1.4
11.4 10.2
9.7
1.6
Stressed
12.2
11.5
10.6
10.0
Normalised
10.5 9.6
1.2
Current
Normalised
1.3
1.2
1.3
Stressed
1.3 1.3
1.2
1.2
1.1 1.1
1.1 1.0
1.0
1.0
8.0 0.8
6.0
0.6 4.0
0.4
2.0
0.2
0.0 DBS
Source: Credit Suisse estimates
UOB
OCBC
0.0 DBS
UOB
OCBC
Source: Credit Suisse estimates
DBS Group (DBS SP, S$16.31, OUTPERFORM, TP S$19.00). We expect overall earnings momentum to be relatively better for DBS (driven by better loan growth, resilient NIMs and non-interest income), with support from cheaper valuations compared to peers and removal of near-term M&A risk. DBS remains immune to the SGD funding competition in Singapore and local asset quality stress in ASEAN markets. Improving macro sentiment in Greater China is positive, but need more clarity on India exposure.
DBS has the most potential for upside as P/B multiples play catch-up and given relatively low downside earnings risks
United Overseas Bank (UOB SP, S$20.45, NEUTRAL, TP S$22.00). We expect a steady earnings momentum near term driven by a stabilising NIM profile. But we could potentially see more conservative loan growth near term with increasing macro risks across the region. Asset quality concerns over ASEAN exposure have also increased. UOB also remains relatively more exposed to SGD funding competition given a stretched 94% SGD loan-deposit ratio. Oversea-Chinese Banking Corp (OCBC SP, S$10.01, UNDERPERFORM, TP S$10.20). While stabilising NIMs provide some downside support to earnings, volatile insurance contribution (which could continue with market volatility) and a potential drag from higher credit costs (with increasing asset quality risks in ASEAN) could mean a weaker earnings momentum compared to peers in the near term. OCBC also has the most downside risks to earnings in the scenario of asset quality normalisation, based on our analysis. Its valuations remain expensive as compared to peers.
Singapore Banks Sector
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12 September 2013
Companies Mentioned (Price as of 11-Sep-2013) DBS Group (DBSM.SI, S$16.31, OUTPERFORM, TP S$19.0) Oversea-Chinese Banking Corporation (OCBC.SI, S$10.01, UNDERPERFORM, TP S$10.2) United Overseas Bank (UOBH.SI, S$20.45, NEUTRAL, TP S$22.0)
Disclosure Appendix Important Global Disclosures I, Anand Swaminathan, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. 3-Year Price and Rating History for DBS Group (DBSM.SI) DBSM.SI Date 08-Nov-10 14-Feb-11 20-Jul-11 15-Aug-11 09-Oct-11 07-Nov-11 02-Apr-12 02-Aug-13
Closing Price (S$) 14.12 14.98 14.96 14.05 11.54 12.66 14.18 17.54
Target Price (S$) 16.00 16.80 16.50 12.50 14.20 19.00
Rating N * N
R N
* Asterisk signifies initiation or assumption of coverage. N EU T RA L REST RICT ED
3-Year Price and Rating History for Oversea-Chinese Banking Corporation (OCBC.SI) OCBC.SI Date 02-Nov-10 20-Jul-11 15-Aug-11 09-Oct-11 03-Nov-11 24-Feb-12 09-Nov-12 28-Feb-13 02-Aug-13
Closing Price (S$) 9.30 9.67 9.21 7.89 8.20 8.99 9.10 10.10 10.74
Target Price (S$) 11.60 11.00 8.40 8.90 9.00 9.30 9.80 10.20
* Asterisk signifies initiation or assumption of coverage.
Singapore Banks Sector
Rating O * O U
O U T PERFO RM U N D ERPERFO RM
24
12 September 2013
3-Year Price and Rating History for United Overseas Bank (UOBH.SI) UOBH.SI Date 09-Nov-10 24-May-11 20-Jul-11 15-Aug-11 09-Oct-11 03-Nov-11 24-Feb-12 03-May-13 05-Aug-13
Closing Price (S$) 18.56 19.12 19.86 18.87 16.57 16.26 18.11 21.80 21.87
Target Price (S$) 22.50 25.00 24.00 19.30 17.70 20.00 21.00 22.00
* Asterisk signifies initiation or assumption of coverage.
Rating N O * O N U N
N EU T RA L O U T PERFO RM U N D ERPERFO RM
The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities
As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neu trals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non -Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark ; Australia, New Zealand are, and prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, 12-month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese ratings were based on a stock’s total return relative to the average total return of the relevant country or regional benchmark.
Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward. Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.
Credit Suisse's distribution of stock ratings (and banking clients) is: Global Ratings Distribution
Rating
Versus universe (%)
Of which banking clients (%)
Outperform/Buy* 42% (55% banking clients) Neutral/Hold* 40% (49% banking clients) Underperform/Sell* 15% (39% banking clients) Restricted 3% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, an d Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investmen t objectives, current holdings, and other individual factors.
Singapore Banks Sector
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12 September 2013
Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research and analytics/disclaimer/managing_conflicts_disclaimer.html Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties. Price Target: (12 months) for DBS Group (DBSM.SI) Method: Our 12-month target price of S$19.00 is based on the Gordon Growth Model. We use the average 2013-14E ROE as a proxy for medium term sustainable ROE, cost of equity (COE) of 9.5% and terminal growth (g) of 3.5%. Risk:
Apart from the performance of the overall economy in two of DBS's key markets, Hong Kong and Singapore, the risks to our target price of S$19.00 for DBS are: (1) the prime-HIBOR spread in Hong Kong; (2) treasury income’s dependence on the steepness of yield curve although DBS is trying to diversify into equity and commodity derivatives; (3) SIBOR’s impact on margins in Singapore; (4) loan growth in Hong Kong/Singapore as well as the emerging markets of China, India and Indonesia; (5) potential acquisitions; and (6) movement of SIBOR in Singapore.
Price Target: (12 months) for Oversea-Chinese Banking Corporation (OCBC.SI) Method: Our 12-month target price of S$10.20 for Oversea-Chinese Banking Corporation (OCBC) is based on a Gordon Growth Model. We use the average 2013-14E ROE (return on equity) as a proxy for medium term sustainable ROE, cost of equity (COE) of 9.5% and terminal growth (g) of 3.5%. Risk:
Apart from the general economic performance in OCBC's key markets of Singapore, Malaysia and Indonesia, the risks to our S$10.20 target price are: (1) a slowdown in loan growth or credit quality deterioration in Malaysia; (2) steepness of the yield curve, which affects profits in insurance subsidiary, Great Eastern Holdings; (3) the continuation of capital management (i.e. share buy-backs); (4) the movement of Singapore Interbank Offered Rate (SIBOR); and (5) normalisation of loan loss provisions.
Price Target: (12 months) for United Overseas Bank (UOBH.SI) Method: Our 12-month target price of S$22.00 for United Overseas Bank is based on a Gordon Growth Model. We use the average 2013-14E ROE (return on equity) as a proxy for medium term sustainable ROE, cost of equity (COE) of 9.5% and terminal growth (g) of 3.5%. Risk:
United Overseas Bank (UOB) is the most geographically diversified Singapore bank, with reasonable presence in Thailand, Malaysia and Indonesia. Apart from the general economic performance and monetary policy in these markets, the risks to our target price of S$22.00 for UOB are: (1) the potential impact by market dynamics in Malaysia, especially if loan growth softens or credit quality suffers; (2) the Thailand operation can potentially double its profits and stop being a drag on ROEs; (3) Indonesia interest rates and economic growth are key variables; and (4) potential for capital management by distributing special dividends and share buy-backs.
Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections. See the Companies Mentioned section for full company names
The subject company (DBSM.SI, UOBH.SI) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (UOBH.SI) within the past 12 months. Credit Suisse provided non-investment banking services to the subject company (UOBH.SI) within the past 12 months Credit Suisse has received investment banking related compensation from the subject company (UOBH.SI) within the past 12 months Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (DBSM.SI, UOBH.SI) within the next 3 months. Credit Suisse has received compensation for products and services other than investment banking services from the subject company (UOBH.SI) within the past 12 months Credit Suisse has a material conflict of interest with the subject company (DBSM.SI) . Credit Suisse is one of the joint financial advisors to DBS Group Holdings Limited in relation to the proposed acquisition of PT Bank Danamon Indonesia Tbk.
Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report.
Singapore Banks Sector
26
12 September 2013
The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (DBSM.SI, OCBC.SI, UOBH.SI) within the past 12 months Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit http://www.csfb.com/legal_terms/canada_research_policy.shtml. As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report. Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Credit Suisse AG, Singapore Branch ....................................................................................................................................... Anand Swaminathan
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Singapore Banks Sector
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12 September 2013
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Investment principal on bonds can be eroded depending on sale price or market price. In addition, there are bonds on which investment principal can be eroded due to changes in redemption amounts. Care is required when investing in such instruments. When you purchase non-listed Japanese fixed income securities (Japanese government bonds, Japanese municipal bonds, Japanese government guaranteed bonds, Japanese corporate bonds) from CS as a seller, you will be requested to pay the purchase price only.
Singapore Banks Sector
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