Singapore banks beat benchmark index as they ride property bull

Singapore

THE local banks' Q3 results - with OCBC kicking off on Thursday - will be scrutinised closely to see if their 2017 strong rally still has legs.

United Overseas Bank and DBS Bank will report Q3 results on Nov 3 and 6 respectively.

Year-to-date, OCBC and DBS have risen as much as 30 per cent while UOB has lagged at a slower 21 per cent. The benchmark ST Index is up just 16 per cent.

It's been a bull market, noted one analyst who declined to be named and wondered if the bank stocks can move another 30 per cent higher given their property exposure.

"The mid-cap property stocks have risen 30 per cent in a month, why not the banks?" he posed. Developer stocks such as Lian Beng, Oxley, Heeton and, Chip Eng Seng have jumped around 30 per cent from a month ago.

After all, as much as 50 per cent of the banks' loans are to the property market via mortgages and construction loans, he said.

What investors will look for is the banks' net interest margin (NIM) trends, wealth management income and if there will be more bad debts especially from the oil and gas segment.

Carmen Lee, head of OCBC investment research, said higher rates should typically be positive for banks, and historically, this has been the trend.

The 3-month SOR (Swap Offer Rate) and Sibor (Singapore Interbank Offered Rate) in Q3 2017 were higher than the previous quarter and Sibor in particular much higher than a year ago.

SOR and Sibor are the wholesale interest rates in Singapore's interbank market.

For DBS, its net interest margin has moved up from a recent low of 1.71 per cent in 4Q16, which was also when the 3-month Sibor rate was at recent lows, to 1.74 per cent in the recent two quarters, said Ms Lee.

DBS chief executive Piyush Gupta had said in February this year that of the bank's Singapore-dollar loan book of S$120 billion, about S$60 billion is priced off Sibor and SOR, and that automatically reprices when Sibor and SOR go up.

Ms Lee said a similar trend was seen for UOB, with its NIM moving from 1.69 per cent in 4Q16 and 1.73 per cent in 1Q17 to 1.75 per cent in 2Q17.

"For 3Q17, with the improvement in 3-month Sibor, we are also expecting NIM to improve for both DBS and UOB," she said.

During the 2Q17 results, DBS guided for NIM of 1.76 per cent while UOB guided for flat or better margin.

Ms Lee is projecting 3Q17 net earnings of S$1189.8 million for DBS and S$788 million for UOB.

As for OCBC, DBS equity research analyst Lim Sue Lin said: "Watch out for NIM trends, non-interest income and provisions and also small one-off gains from disposal of investments.

Taking the cue from Great Eastern Holdings's results, OCBC's non-interest income should be decent, she said.

"Although insurance income contribution would likely be lower q-o-q, this would be offset by the improved wealth management business during the quarter, which we understand, should remain strong."

GEH, OCBC's insurance unit on Tuesday posted net profit of S$235.5 million for the third quarter ended Sept 30, 2017, 21 per cent higher than last year's S$195 million.

For the nine months ended Sept 30, the group's net profit was S$732.9 million, up 86 per cent from the same period a year ago.

"This increase was due to higher operating and non-operating profit, as well as higher profit from shareholders' fund's investments," the company said.

Ms Lim said there should be no surprises in OCBC's expense trends with cost-to-income ratio ranging at 40-45 per cent.

"Its NIM however could be flattish. While Sibor/Sor-related loans could start to see some repricing, its Hong Kong book may still dent NIM marginally due to the differential in the movement of its loan and deposit pricing (the relative movement of the 1-month and 3-month Hibor). Hibor (Hong Kong Interbank Offer Rate) is the key wholesale interest rate in the Hong Kong interbank market.

Ms Lim has a buy on OCBC with a target price of S$12.80. It closed on Wednesday at S$11.55, up 0.8 per cent.

As for UOB, Ms Lim has upgraded from a hold call to buy with a target price of S$26.90, saying the stock is "ready for lift off." It ended 1.4 per cent higher to S$24.60 on Wednesday.

UOB has lagged its peers YTD and more evidently post 2Q17 results, she said.

"Expect a strong set of 3Q17 earnings," she said.

We expect 3Q17 results to be stronger with a further improvement in NIM and more importantly, a pickup in loan growth due to the recovery of the property market, said Ms Lim.

Corporate loan growth, particularly from property developers, is likely to drive loan growth for 3Q17. As there may be a few more blips on the asset quality side, albeit in a much smaller quantum vs a year ago, specific provisions may still stay relatively high. Cost-to-income ratio will likely ease as revenue growth picks up.

"We believe it is time for its fortunes to turn based on three catalysts," she said. The three catalysts are the property market recovery, NIM improvement and end to its asset quality woes.

Corporate loan growth, particularly from property developers, is likely to drive loan growth for 3Q17.