Singapore banks reported first quarter results in the last week of April and Macquarie Equities Research released a research report on Wednesday (6th May) stating its preference for UOB over the other local banks. Read on for excerpts from the research report……

Impact

MER’s key takeaways from 1Q15 reporting - The first quarter highlights were a deceleration of domestic loan growth and weakness in trade finance particularly in Greater China. DBS and OCBC did not deliver on market expectations on net interest margin (NIM) expansion, while UOB surprised positively. For the sector, asset quality is holding up and non-interest income was seasonally strong. The bottom line is that volume growth and topline growth will be more difficult to find. In this context, MER continues to prefer the bank with the least aggressive market topline growth expectation for 2015 – which is UOB.
 
Margin and volume growth trends - For the full year MER expects 6% loan growth YoY and 2bp increase in margins to 171bp for the sector. UOB was the only bank that maintained its loan growth guidance and increased NIM guidance for the full year. The other two banks cut their loan growth guidance to mid-single digits, from previously high single digits for the full year due to sluggish loan demand in Singapore and headwinds for China related trade finance loans. NIM disappointed for DBS and OCBC due to Greater China (trade finance) and higher liquidity positions while UOB surprised positively.
 
Asset quality trends – For the full year MER expects the non-performing loan (NPL) ratio to increase only moderately by 10bp to 1.0% and expect a provisioning ratio of 28bp (vs 24bp in 1Q15) for the sector. In 1Q15, the NPL ratio for the sector remained stable at 0.9%, however NPL volumes in Singapore increased by 14% QoQ from a low base. While MER remains watchful on (i) commodity finance related exposures; (ii) China non-trade finance exposures; and, (iii) Indonesia non-trade exposures, MER continues to believe that it is too early to make a more negative call on asset quality for the Singapore banks.
 
Capital adequacy – The sector as a whole looks adequately capitalized at 11.9% fully loaded CET1 ratio. Looking at the individual banks, UOB looks slightly overcapitalized (12.8% CET1 ratio), DBS adequately capitalized (12.2% CET1 ratio) and OCBC undercapitalized (10.7% CET1 ratio).

MER’s outlook

Despite visible headwinds for volume and topline growth, MER remains Overweight Singapore banks on a regional sector basis. Valuation multiples are not excessively expensive and asset quality will likely hold up for the rest of the year MER believes. MER marginally cuts its earnings per share (EPS) mainly due to lower than expected interest income. MER slightly increases its target prices mainly by assuming lower cost of equity (CoE) for Singapore banks given the increase in capital ratios in 1Q15.
 
UOB (Outperform, Target price: S$27.00) remains MER’s top-pick given less aggressive market expectations on topline growth. For DBS (Outperform, S$23.00) MER expect better NIM momentum in the second quarter. DBS will likely show the strongest earnings momentum among the Singapore banks for the full year, which is however reflected in market expectations. While market expectations for OCBC (Neutral, S$10.50) do not look particularly aggressive, MER remains guarded on the revenue synergy story from the WHB bank acquisition and capital adequacy.

Source: Macquarie Research - 8 May 2015