Singapore Banks

PART ONE

OVERWEIGHT

2014 Interim Review 20 Oct 2014

OCBC – the dark horse worth betting on NIMs of three banks narrowing. NIMs of UOB now only 1bp higher than OCBC, the latter has been able to maintain its NIMs for the past few quarters. DBS saw another 1bp uptick as NIMs of its RMB loans did not fall as much as anticipated. NIMs are expected to hover around current levels for the rest of the year. Loans growth slowing. DBS’ loans grew the slowest in the first half, slipping to below 10%. UOB & OCBC posted 5% to 6% ytd loans growth, higher than DBS’ 3%. Loans growth f or the full year is likely to be between 8-10%. Fees & Commission Income generally weaker due to sharp fall in marketrelated activities. Excluding these activities, OCBC’s core banking fee income continued to outperform its peers, posting a 11% growth for the first half. Trading Income – OCBC outperformed peers for the first time posting strong growth both on y-o-y and q-o-q basis while its peers, particularly DBS, saw sharp falls in trading income due to the weaker RMB. The most cost efficient bank – OCBC. Even after stripping off contributions from GEH, OCBC still had the lowest cost-to-income ratio for two consecutive quarters. Strongest and most profitable bank : UOB continues to deliver the highest ROE and ROA amongst the three local banks while its CET1 is also the highest. Sector Recommendation: Maintain Overweight. We are maintaining our overweight position on the sector, with BUYs for UOB and OCBC.

FTSE STI Comparison Chart (FS STI), DBS, UOB, OCBC 2Q2014 results

Source: Bloomberg

Lynn Look (CFA) (+65) 6233-6887 [email protected] www.nracapital.com

(S$ m, FYE Dec)

UOB

OCBC

DBS

Total Income Net Interest Income Non-Interest Income Operating Profit Impairment Charges Core Net Profit EPS/share (S$) NAV/share(S$) RNAV/share(S$)

1884 1124 760 1098 150 808 1.97 16.18 18.80

1976 1126 850 1216 66 921 1.06 7.31 9.23

2313 1557 756 1259 128 969 1.57 14.21 14.60

Source: Company

%change Y-o-Y UOB OCBC 11 21 20

26 17 40 43

DBS 0 13 -18 -5

>100 3

-22 54

-48 9

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Singapore Banks This week we saw sluggish economic data out of Europe and the United States, weaker growth in China and mounting fears over Ebola and a war against the ISIS. Singapore banks will be releasing their 3Q results in two weeks’ time. We see this as an opportune time to review how well Singapore banks have performed so far and what to expect for the rest of the year. This the first of our 4-part series on what we expect for the coming results release. We will be providing more in-depth analysis of each major income component in the various income sources over the next few days.

Interim Results Review- OCBC the dark horse The 2Q14 results were generally in line with our expectations at the operating level, except for OCBC whose results came in much better than expected, boosted by its higher treasury income and higher marked-to-market gains from GEH. NIMs of three banks narrowing. UOB’s NIMs slipped 1bp 1o 1.71%, DBS’ gained 1bp to 1.67% while OCBC’s held steady at 1.70% from the previous quarter, as NIMs for their RMB loans did not fall as much as anticipated after liquidity resumed in 2Q after a sudden spike in 1Q14 due to tightening liquidity. NIMs are expected to hover around current levels for the rest of the year. The good news is corporate loan yields are seeing an uptick as bankers start to reprice their corporate loans more sensibly to reflect their inherent credit risk as credit risk of loans have to be taken into account under the new Basel III CAR calculations. Loans growth of between 9% and 12% clocked in the first half. Slower loans growth of low double digits were posted by UOB and OCBC while DBS’ slipped below 10%. Ytd, UOB and OCBC have clocked in 5-6% growth in their loans portfolio while DBS’ is lower at 3%. Loans growth for the full year is likely to be between 8-10%, driven mainly by regional loan demand. Fees & commission income growth in Q2 was generally lacklustre. OCBC’s fees & commission income grew only 2% and DBS 5% while UOB’s fell 6% y-o-y during the quarter, all dragged down by market related activities such as funds management, wealth management, investment banking and brokerage. Excluding these market-related activities, OCBC’s core banking fees & commission income in fact outshone its peers, posting the highest y-o-y growth of 3% during the second quarter and 11% for the first six months of the year. Trading Income – OCBC outperformed. 2Q trading income fell by nearly half for DBS, both on a y-o-y and q-o-q basis as third party treasury activities fell sharply with the weakening RMB in April and May which led to lower demand for RMB hedging and hence lower treasury income. UOB’s trading income also fell but by a smaller quantum, down 15% y-o-y. At half-time, DBS’s trading income fell 28% y-o-y while UOB’s was little changed from a year ago. OCBC however surprised with a close to 50% y-o-y jump in trading income in the second quarter as it saw a pickup in treasury-related income from customer flows, This was 35% higher than the previous quarter and nearly 60% higher than a year ago for the six month period. OCBC – most cost efficient bank for the last two quarters. Excluding GEH contribution, OCBC’s cost-to-income ratio of 42.2% is still the lowest of the three local banks for past two consecutive quarters. Balance Sheet Strength and Bank Profitability. UOB’s CET1 CAR (fully loaded) of 12.5% is the highest amongst the three local banks. UOB also continues to deliver the highest ROE of 12.4% and ROA of 1.1%. Excluding GEH contribution, OCBC’s ROE would have fallen from 14.9% to 11.2% and its ROA from 1.27% to 1.0% (see table below).

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Singapore Banks China trade exposure. Tabulated below is Singapore banks’ China loans exposure as at 30 June 2014. Although DBS has more trade-related China loans compared to its peers, its NPL rate is surprisingly the highest, despite having less non-trade loans than OCBC. UOB’s China books are the best, with only S$30m non-performing loans compared to S$102m for OCBC and S$289m for DBS.

China Trade exposure(S$bn) Trade related loans Non-trade loans Government Bonds Total NPLs(S$m) NPL rate(%) Group NPL rate(%)

DBS

OCBC 36 14 na 50 289 0.6 0.9

8 19 na 27 102 0.3 0.7

UOB 15 12 2-3 29- 30 30 0.2 1.2

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Singapore Banks Appendix 2Q2014 (S$m) Key Financial Data Loans Growth (yoy) Deposit Growth (yoy) Loan-to-Deposit ratio Fee Inc/Total Inc % Non-Int Inc/Total Inc % 2Q Net Interest Margin % - y-o-y chg (bp) - q-o-q chg (bp) 2Q14 vs1Q14 Cost-to-Income ratio % NPL Rate % ROE % ROA % CET1 CAR -fully-loaded (%) Tier 1 CAR (%) Total CAR (%)

UOB

OCBC

12 8.5 87.8 21.8 38.6 1.71 0 -2 41.7 1.2 12.5 1.10 12.5 13.9 17.8

12 14 87.2 17.8(21.3) 43.0(33.1) 1.70 +6 0 38.5(42.2) 0.7 14.8(10.6) 1.27(1.0) 11.3 14.7 17.4

DBS Comments DBS underperformed peers Fastest at OCBC All at comfortable range Highest at UOB UOB the highest UOB ‘s NIMs slipped further but still the highest China trade NIMs did not fall as much as anticipated NIMs expected to hover around current levels OCBC’ the lowest even if exclude GEH contribution Little changed from previous quarter UOB’s still the most profitable UOB’s still the highest UOB’s the highest OCBC’s the highest UOB’s the highest

9 9 86.0 21.7 32.7 1.67 +5 +1 45.6 0.9 11.0 0.93 12.2 13.5 15.7

* figures in brackets exclude GEH contribution and divestment gains Source: 2Q2014 Company results releases

1H2014 Results comparison

3045 1719 4764 2095 2669

%change Y-o-Y UOB 13 5 10 9 11

OCBC 18 29 22 5 36

DBS 12 -10 3 8 -1

107

279

50

2

-40

2297 1820

2454 2002

2 6

38 41

8 9

FYE Dec (S$ m)

UOB

OCBC

DBS

Net Interest Income Non Interest Income Total core Income Operating Expenses Operating Profit Allowance for loans/asset impairment Pretax Profit Core Net Profit

2234 1402 3636 1542 2094

2213 1650 3863 1466 2397

307 1857 1596

Comments OCBC posted the highest net interest income growth OCBC’s non-interest income boosted by strong trading income OCBC outperformed on both interest & non-interest front OCBC saw lowest increase in operating expense OCBC outperformed; DBS underperformed peers UOB up its provisionings by 50% but DBS’’was cut by 40% DBS’ boost came from sharp fall in provisioings OCBC all round outperformer

Source: Companies

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Singapore Banks

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