Asset quality stress, dividend cap in focus for Singapore banks in 2021

Singapore

SINGAPORE banks' asset quality risks are expected to remain manageable for now, buoyed in part by hefty provisions and extended relief measures.

Ahead of the banks' fourth-quarter 2020 results this month, analysts say they will watch their post-moratorium repayment trends in the quarter. They are also awaiting clarity on the banks' dividend cap, with broad expectations of higher payouts in 2021 as business sentiment lifts.

In a note, Citi analyst Robert Kong said that the sector's third-quarter results, which broadly beat estimates, are a sign that asset quality "may not be as bad as first feared".

"Q4 results are likely to show similar early recovery trends as Q3, with Q4 giving banks a 'free pass' to book elevated provisions if desired, to clear the path for lower credit costs in 2021," he added.

He expects lower provisions to be the key driver of a 30 per cent profit growth in 2021. Full-year credit costs are also forecasted to fall from about 75 basis points (bps) in 2020 to 30 bps in 2021.

Robust property sales in Singapore are positive for the banks, given that default is impacted by collateral values. Extended government support may also mitigate non-performing loan (NPL) risk for small and medium-size enterprises (SMEs), said Mr Kong.

As at Q3 2020, the proportion of OCBC's loan book under moratorium stood at around 5 per cent, similar to DBS's, while UOB's loans under moratorium were at 10 per cent.

Last October, the Monetary Authority of Singapore (MAS) said that selected SMEs can defer 80 per cent of principal repayment up to June 30, 2021.

With this six-month extension, DBS analyst Lim Rui Wen said, peak NPL for the sector may only be reflected towards the first half of 2021.

CGS-CIMB analyst Andrea Choong noted that updates on banks' post-moratorium repayment trends in Q4 will be crucial in gauging asset quality expectations for 2021.

While hefty front-loading of impairments in 2020 will most likely see year-on-year credit costs improve, a sustained decline in loans under moratorium - along with improvements in business transaction volumes and contained NPL accretion - could signal further cuts in impairment expenses, said Ms Choong.

Maybank Kim Eng analyst Thilan Wickramsinghe sees sector NPL rising to 2.1 per cent this year, the highest levels since the global financial crisis.

About 3 to 4 per cent of system loans are estimated to be under moratoriums, raising asset quality risks, he said in a report.

That said, the banks are projected to have raised provisions by 3.4 times year-on-year in 2020, and load up 54 per cent more in 2021 to hit a provision coverage of 94 per cent.

With expectations of more targeted relief for vulnerable Covid-19 frontline sectors, coupled with higher economic activity in Phase 3, more downside protection for asset quality issues can be expected, said Mr Wickramsinghe.

"Asset quality risks remain elevated but continued relief measures may see it kicked further down the road," he added.

Citi's Mr Kong cautioned that a key tail risk event would be a large corporate turning NPL with high loss rates, or material bond defaults.

For example, UOB KayHian analyst Jonathan Koh expects DBS's S$160 million exposure to China-based Huachen Automotive Group to be recognised as an NPL in Q4 2020.

DBS's NPL ratio is projected to fall slightly to 1.7 per cent quarter-on- quarter in Q4. Credit costs are expected to come in at 62 bps, compared to 59 bps in Q3.

There also comes renewed focus on Singapore banks' dividend payouts this year as regulators globally soften their stance on dividend caps.

Last July, MAS called on the local trio to cap dividends per share (DPS) at 60 per cent of 2019's DPS to shore up capital.

Maybank's Mr Wickramsinghe has projected for the cap to be relaxed to 80 per cent of 2019 levels this year.

Assuming the cap is removed, UOB KayHian estimated for DBS to provide DPS of S$1.08 for 2021 and S$1.32 for 2022, which represent dividend yields of 4.1 per cent and 5 per cent respectively.

OCBC is expected to provide DPS of S$0.50 for 2021 and S$0.56 for 2022, which translate to dividend yields of 4.7 per cent and 5.3 per cent respectively.

CGS-CIMB's Ms Choong said: "There is enough reason not to extend the cap given improving economic activity levels, large impairment buffers built up in 2020, strong capital ratios, and targeted government aid beyond the expiry of loan moratoriums across the region."

With near-zero benchmark rates, the sector's net-interest margins (NIMs) are expected to diverge.

CGS-CIMB expects UOB to outperform its peers in Q4 2020, given NIM growth in Q3 and steady non-interest income (NII).

On a quarterly basis, UOB's Q3 NIM rose 5 bps to 1.53 per cent, OCBC's fell 6 bps to 1.54 per cent, and DBS's fell 9 bps to 1.53 per cent.

DBS's Ms Lim reckoned that UOB's NIM has largely bottomed out as the bank continues to manage its deposit cost. But OCBC may see further downside pressure as it has lagged its peers in repricing loans, she said.

Citi's Mr Kong has factored in about 5 bps of NIM pressure for DBS due to strong CASA (current account and savings account) growth being placed out at low yields.

Across the sector, NII is expected to be flattish in Q4, from a quarter ago. This comes as growth in credit cards and wealth-management fees may be offset by weaker loan-related fees and trade-related fees, among others, said DBS's Ms Lim.

DBS will kick off the Q4 results season on Feb 10, followed by OCBC on Feb 24 and UOB on Feb 25.

Shares of DBS closed at S$25.28 last Friday, up four Singapore cents; OCBC closed at S$10.30, up four cents; UOB closed at S$23.54, up 10 cents.