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Monday, 25 July 2016

#DBS emerges as #DeutscheBank’s only ‘buy’ in challenging bank sector

MALAYSIA/SINGAPORE (July 25): Despite signs of improved lending and expectations of stable 2Q16 results among Singapore’s bank sector, Deutsche Bank says challenges could be plentiful if low interest rates persist in 2H16.

Hence, a lack of strong re-rating catalysts makes DBS its only “buy” rated bank at a target price of S$19.80, for its “undemanding valuation and better risk/reward dynamics”.

OCBC and United Overseas Bank (UOB) have been rated at “hold” with target prices of S$9.50 and S$20.00 respectively.

In a Friday report, analysts Franco Lam and Sukrit Khatri say they expect the general sector’s earnings to be flat q-o-q, after a seasonally stronger 1Q.

Overall, they forecast that key trends will include flat-to-down net interest margin (NIM) with loan demand remaining soft; continued flat fee income q-o-q; stable cost-to-income ratio; as well as resilient asset quality and stable credit costs due to limited commodity-related concerns in the quarter.

Lam and Khatri have also predicted the following for Singapore’s banks:

DBS 2Q16 net earnings — around S$1,100 million (-6% q-o-q, -2% y-o-y)

Look out for: Progress in DBS’s partnership with Manulife, asset quality trends including those in China, as well as the oil and gas (O&G), property and SME sectors.

Due to recovery in loan demand in the quarter, the analysts expect DBS NIM to have held in 2Q16. The drop in interbank rates after 1Q16 will only be felt by 2H16, they add, as the bank’s sensitivity to domestic interest rates would likely to have lagged behind domestic peers. Strength in fee income is expected to continue, while growth rate and trading income could have been weaker in the quarter. Also, bad debt provisions are projected to be sequentially higher q-o-q, partially due to RMB depreciation.

OCBC 2Q16 net earnings — around S$870 million (+2% q-o-q, -8% y-o-y)

Still-weak loan demand and lower interbank rates may have led to slightly lower q-o-q margin, with the non-interest income line experiencing continued volatility due to GE contribution. Other fees, especially wealth-management related ones, would have remained under pressure, say the analysts. “Asset quality issues in MY and IDK, and SME book, O&G and the commodity sectors need to be watched,” they add.

UOB 2Q16 net earnings — around S$805 million (+5% q-o-q, +6% y-o-y)

More margin pressure is expected as Deutsche observes that UOB is faster in re-pricing earning assets on changes to interest rates. NIM is projected to have fallen 5bps q-o-q. The analysts expect a better recovery for UOB in 2Q in terms of fees and trading income, after a soft 1Q16 fee income. “Commodity sectors continue to require an intense watch, as they are vulnerable to (UOB’s) asset quality,” add Lam and Khatri, who foresee that credit cost has remained close to the guidance of annualised 32 bps for the year.

As at 11:05 a.m., shares of DBS were trading 0.12% lower at S$16.27; OCBC was down 1% at S$8.89; and UOB was down 0.26% at S$19.

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