The  3QFY13  reporting  season  panned  out  broadly  as  expected.  Loan growth  momentum  softened  while  trading  and  market-related  fee income  fell  due  to  uncertainties  surrounding  QE  tapering,  thus dampening bottomlines.  We expect these broad trends to  linger  in the near term, which means  earnings may continue to lack spark.  Maintain NEUTRAL on the sector, with DBS and UOB as our BUYs.

3Q2013 results roundup

The recent 3Q2013 reporting quarter saw all three banks report earnings that were generally within our and consensus expectations. Both DBS and UOB reported a q-oq drop in net profit of 3% (+1% y-o-y) and 7% (+3% y-o-y) respectively, largely due to softer  trading  income  (DBS)  and  the  absence  of  lumpy  gains  from  sale  of investments (UOB). On the other hand,  OCBC saw a strong q-o-q rebound in group net profit  (+27% q-o-q/-59% y-o-y)  mainly due to unrealised mark-to-market (MTM) gains from Great Eastern's (GE) non-participating fund, without which the bank's  net profit  would  have  dropped  12%  q-o-q  due  to  weaker  trading  income  as  well  and higher loan allowances.

Key takeaways from results
We set out below the key takeaways from the recent reporting quarter.

Net  interest  income:  DBS  (+2%  q-o-q;  +6%  y-o-y);  OCBC  (+2%  q-o-q; +4% y-o-y); UOB (+3% q-o-q; +8% y-o-y)

Q-o-q net interest income growth was decent, led by volume  growth. The three banks reported q-o-q loan growth of  2-3% (+16-19% y-o-y).  DBS and OCBC continued to report strong growth in trade finance and  housing loans while UOB's robust growth from  its  Greater  China  portfolio  was  driven  by  Hong  Kong  corporate  loans.

Meanwhile, NIMs were broadly stable q-o-q (-7 to  -13bps y-o-y) for the three banks, although DBS saw a larger 2bps q-o-q drop in NIMs (UOB: flat q-o-q; OCBC: -1bp qo-q)  due  to  measures  taken  in  anticipation  of  QE  tapering.  Average  asset  yield remained  under  pressure,  but  was  cushioned  by  lower  average  funding  cost.  The ability  to  hold  NIMs  steady  was  all  the  more  impressive  considering  that  all  three banks pumped up liquidity during the quarter, resulting in lower  loan-to-deposit (LDR) ratios.

Given the strong  y-o-y  loans  growth  so  far,  the banks appear set to end 2013 with full-year  growth  of  around  the  mid-teens  range.  Looking  ahead  to  2014,  the  initial guidance is for  loan growth  of around high single digits. We believe  that  part of the slowdown (vis-à-vis 2013) would be due to slower growth in housing loans, especially in 2H2014,  at the property cooling measures that have been introduced by MAS kick in. Already, both DBS and OCBC  reported that  new mortgage bookings/applications are  down  30%  from  a  year  ago  while  UOB  saw  a  30-40%  drop  in  mortgage  loan approvals from a year ago. With  respect to NIMs,  we believe  that margins should continue to hover  at  around current levels. The re-pricing of mortgages post the trough in Sept 2012 is starting to be felt and  will help  to  stabilise asset yields  in  the consumer segment. Also, funding cost  has  remained  under  control  while  the  banks  remain  comfortable  turning  to wholesale funding  to help supplement customer deposits,  given that such funding is still cheaper than fixed deposits. Non-interest  income:  DBS (-20% q-o-q; +11% y-o-y); OCBC (+29% q-oq; +3% y-o-y); UOB (-2% q-o-q; -11% y-o-y)

Not  surprisingly,  overall  non-interest  income  (ex-insurance  contribution  for  OCBC) was weaker q-o-q.  Market uncertainties led to tougher trading conditions and a drop in customer flows, as well as lower market-related fee income. That said,  there were
still  some  positive  takeaways  for  the  banks.  UOB's  3QFY13  fee  income  of SGD407m, while down 7% q-o-q,  remained above the normalised quarterly run rate of SGD350-SGD400m that management guided previously.  In  OCBC's case,  its  fee
income of SGD352m (+1% q-o-q) exceeded the previous quarterly high in 2QFY13.

Going  forward,  with  prospects  of  QE  tapering  still  looming,  we  expect  trading  and market-related fee income to remain volatile.

Overheads:  DBS (-4% q-o-q;  +5% y-o-y); OCBC (-5% q-o-q;  -1% y-o-y); UOB (-2% q-o-q; +4% y-o-y)

Overheads  were  generally  under  control,  with  all  three  banks  reporting  lower expenses q-o-q while y-o-y, the rise was capped at 5%. Cost-to-income ratios  (CIR) were mixed,  with OCBC and UOB reporting a drop in CIR to 38.8% (from 45.8% in 2QFY13) and 43% (2QFY13: 44.2%) respectively  although DBS' CIR rose to 44.1% from 42.7% in 2QFY13. 

Loan allowances :  DBS (-38% q-o-q; +194% y-o-y); OCBC (+10% q-o-q; +66% y-o-y); UOB (-56% q-o-q; -51% y-o-y)

Aggregate loan allowances were generally lower q-o-q. Specific allowance charge-off stood at 10bps vs 2QFY13's 13bps, with the decline due to lower specific allowances reported  by  both  DBS  (-27%  q-o-q)  and  UOB  (-73%  q-o-q),  while  OCBC  reported higher specific allowances (+282% q-o-q) relating to  its  ex-Singapore and Malaysia portfolio.  Meanwhile, the collective allowances  of  all three banks fell q-o-q, largely a function of slowing loan growth.

Thus  far,  the  banks  appeared  comfortable  with  respect  to  asset  quality.  While  no systemic  issues  have  been  noted  as  yet,  DBS  highlighted  again  that  its  mid-cap portfolio in India is a potential soft spot. There were also some cases of loans being classified  as  impaired  at  the  regional  operations  (Malaysia  and  Greater  China  - OCBC) that led to an uptick in NPL in those countries.  However, such cases appear isolated.  UOB  was  the  only  bank  that  reported  a  sequential  improvement  in  asset quality, although this was helped by foreign currency translation effects.

Risks
The  risks  include:  i)  slower  than  expected  loan  growth;  ii)  weaker  than  expected NIMs;  iii)  a  deterioration in asset quality; and  iv) changes in market conditions that may adversely affect banks' investment portfolios.

Forecasts
We left our net profit forecasts unchanged for DBS and UOB. For OCBC,  our FY13 net profit  forecast is unchanged but  we raised our FY14 net profit projection by 6% after  revising  down  our  total  credit  cost  assumption.  OCBC's  9MFY13  credit  cost remains low at just 17bps (annualised). Hence, we  believe our previous FY14  total credit cost assumption of 34bps was too conservative and accordingly, lowered  this to 21bps.

Valuations and recommendations
Overall, we think that near-term earnings are unlikely to excite  in view of slowing loan growth.  Also, with QE tapering just a matter of timing, trading and market-related fee income could remain choppy.  That said,  the results suggest  that  funding cost is not under  upward  pressure  and  this  has  helped  NIMs  hold  steady  while  asset  quality remains  benign. We retain our NEUTRAL call on the sector. We think any weakness in share price would  present good buying opportunities. We like DBS (DBS SP; BUY, FV: SDG19.40) given its earnings growth profile, while the stock's  valuations are still at  a  discount  to  peers.  The  bank  is  also  less  vulnerable  to  policy  changes  in  the property market sector given its relatively smaller exposure to this  segment.  As for UOB  (UOB  SP;  BUY;  FV:  SGD24.50),  its  underlying  trends  remain  decent  while longer term, we think the group is well positioned to benefit from Asean's rise as a new growth haven.

Source: OSK