Singapore banks may shop for buys as fears over bad debts recede

Singapore

EYES will be on Singapore banks' acquisition plays in the region as the trio release their first-quarter results, with asset quality largely stable following the expiry of debt holidays.

There is growing focus on the banks' regional growth strategy as business conditions improve. DBS and OCBC are among banks set to bid for Citi's consumer assets up for sale in Asia. DBS also recently made its largest acquisition in China, with a new stake in Shenzhen bank.

Several global banks have posted stronger results on the back of write-backs on bad-debt provisions. Such writebacks are not expected from Singapore banks, but caution from the local trio means the trio will be prepared for any new soured loans as moratoriums roll off.

Higher dividends are also on the horizon with banks having signalled their ability to commit to more payouts this year. Analysts expect at least a 50 per cent dividend payout ratio, subject to guidance from the Monetary Authority of Singapore (MAS).

In a sector note, Maybank Kim Eng analyst Thilan Wickramasinghe said Singapore banks' provisioning growth should continue to retreat given a "better than expected" asset quality environment.

This comes as loans under moratorium have fallen significantly as Singapore's blanket debt relief programme tapered off in end-2020.

At DBS, loans under relief declined from 5 per cent last September to 1 per cent as at end-January. For OCBC, this number fell from 4 per cent in December to 2 per cent by end-January. Over at UOB, loans under relief are roughly 90 per cent collateralised, making up about 6 per cent of its loan book as at end-January from 9 per cent last December.

Sector credit charges fell to 55 basis points (bps) in H2 2020,compared with 85 bps in H1 2020. More deceleration is expected in Q1 this year, with gross non performing loans (NPLs) flat at around 1.57 per cent for the past two quarters, Mr Wickramasinghe noted.

But, unlike the US banks, provision write-backs for the Singapore trio will be unlikely in Q1. "Regionally, resurging Covid-19 infections and uncertain border reopenings should keep the sector cautious," he said.

DBS analyst Lim Rui Wen projected for OCBC and UOB's NPLs to rise by more than 2 per cent through 2021 as targeted moratoriums for hard-hit sectors start to roll off this year.

Under the Extended Support Scheme (Standardised), SMEs in sectors like aviation and tourism can still defer 80 per cent of principal payments and selected Enterprise Singapore's schemes till end-June.

As at end-February, loans still under moratorium made up about one-fifth of those approved for extended relief. These loans amounted to more than S$3.8 billion in loan principal, according to MAS.

That said, Singapore banks have taken hefty provisions - the highest since 2015. Barring any unexpected credit deterioration through 2021, current NPL coverage ratios should support the increasing bad debt ahead, said Ms Lim in a note.

Post-Covid, Citi analyst Robert Kong expects banks to pursue "bolt-on" M&A opportunities if deals "make sense" in terms of price paid, business fit, synergies, manageable integration costs, and the prospect of being earnings-accretive within a reasonable time frame.

In line with its China and India expansion plans, DBS recently acquired a 13 per cent stake in Shenzhen Rural Commercial Bank (SZRCB) for S$1.08 billion. The investment is expected to be immediately accretive to earnings.

This follows closely from its takeover of India's Lakshmi Vilas Bank last November, both giving the bank greater retail exposure. DBS's profit mix is currently dominated by Singapore (70 per cent) and Hong Kong (20 per cent).

SZRCB operates one of the largest bank branch networks in Shenzhen, where 210 of its 217 branches are located. About 60 per cent of its loan book is in the corporate segment and 40 per cent in retail.

In FY2020, the bank recorded S$106 billion in total assets, S$82 billion in deposits and S$976 million in net profit after tax. Average return on equity (ROE) stood at over 17 per cent since 2005.

Citi's Mr Kong said: "The strategy is to accelerate DBS's growth in the Greater Bay Area, create collaboration between SZRCB and DBS HK/China - we view fees as a key area of growth - and benefit the rest of DBS's regional network."

The deal's impact on DBS's capital ratios is estimated to be less than 0.2 percentage point, which is "minimal" given the bank's robust CET1 ratio of 13.9 per cent, CGS-CIMB analyst Andrea Choong noted.

Headline figures for the transaction are "assuring", she added, as the acquisition price is comparable to valuations of Chinese banks. A ROE of 12 per cent for DBS's stake in SZRCB is in line with Chinese banks.

Still, investors may be concerned with how further M&As may affect the bank's dividend policy as well as management bench depth to handle multiple deals, Citi's Mr Kong flagged.

Across the sector, analysts expect a boost to banks' Q1 earnings on stabilising net interest margins and stronger fee income, largely from wealth management.

"This could accelerate into H2 2021, as a clear path to herd immunity is established regionally," said Maybank's Mr Wickramasinghe, adding that reserve releases and loosening dividend caps are further upside catalysts for the sector.

Analysts are awaiting further clarity from MAS on bank dividends. A complete removal of restrictions may not be on the cards this year, given NPL risks and lingering Covid-19 impact, DBS's Ms Lim said.

A "two-stage relaxation scenario", where banks would be initially allowed to pay out up to a percentage of their 2021 net profit prior to the complete removal of restrictions, seems to be the more likely option, she noted.

Citi's Mr Kong is expecting a 50 per cent dividend payout ratio by July. This would imply a dividend yield of about 4.5 per cent for the sector.

For FY21, CGS-CIMB projected for DBS's dividend payout ratio to be at 48.5 per cent, from 46.9 per cent in the previous year. UOB's is expected to come in at 50.6 per cent, up from 44.7 per cent.

As at Q4 2020, Singapore banks' CET1 ratios of 13.9 to 15.2 per cent were well above their comfortable operating range. This means the banks can revert to FY19's dividend payout levels and will still have ample capital buffers, said DBS's Ms Lim.

She added: "We believe banks may adjust their high capital buffers via special dividends from FY22, subject to asset quality and corporate actions at that juncture, as banks navigate through a Covid-19 recovery. Should provisions come within managements' current expectations, we believe there is a case for some special dividends from FY22."

DBS will open the first results season of year on April 30, followed by UOB on May 6 and OCBC on May 7.

Shares of DBS closed at S$29.40 on Wednesday, up 10 cents; OCBC closed at S$12.15, up 10 cents; UOB closed at S$26.69, up 11 cents.

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