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DBS and OCBC Tops Soft Quarter in Citi Selection
Aspire, Hot Picks | 24 March 2015
By: Elaine Lee
Articles (11) Profile

In light of the recent 4Q14 earnings results from the banking sectors, Citi Research remains certain that “moderation has set in,” sighting similar trends from mid year.

Citi believes NIM (net interest margin) recovery would be gradual due to funding pressure. The recent spike in the three months Singapore Interbank Offered Rate (SIBOR) and Singapore Swap Offer Rate (SOR) have increased by around 103 percent and 45 percent respectively.

This translates to a weaker Singaporean dollar and a tighter domestic liquidity. DBS was seen as the key beneficiary while OCBC is more ‘hesitant’ on the NIM upside.

Amongst the local banks, the house favors DBS for sustaining highest NIM leverage to eventual rates rise followed by OCBC on their Wing-Hang acquisition synergy upside.

DBS Bank Holding 89% SGD CASA

It is speculated that DBS will achieve a net positive as the SIBOR continues to increase. After all, DBS has an advantage over its peers with a Singapore Dollar CASA (Current-Savings Account) of 89 percent. Their market share of the Singapore Dollar denominated savings accounts has been stable at 52 percent.

Citi noted that key positives for DBS were based on their good loan growth of 11 percent YoY (year-on-year) and improved NIMs on lower deposit costs.

These were outstanding results despite the sharp fall in net trading income which was one of the house’s main concerns. Lower non-II (non-interest income) with broad-based weakness in fees and trade asset yields were amongst the other concerns.

On the possibility of a rate hike by US Federal Reserve this year, DBS is perceived as the prime beneficiary. Though slow deposits growth and increased funding competition may put pressure on banks, DBS still offers the best risk-reward with more upside catalysts compared to its peers.

DBS has an overall stable asset quality and is standing at a market cap of approximately $49 billion, making it the most valuable company in Singapore. Although provision charges will remain conservative, Citi Research sets a $21.70 target price for DBS and as the former’s top pick.

OCBC Bank Benefits From WHB Takeover

Preferences were mainly because of OCBC’s acquisition of Wing Hang Bank (WHB), now known as OCBC Wing Hang as it gains greater presence in Greater China.

4Q14 earnings were $791 million, a six percent decrease from the previous quarter. However, core profits were $3.45 billion and in line with consensus of a 2 percent quarter on quarter (QoQ) increase in Net Interest Income (NII) in loans.

Essentially, the report reflected that much of the earnings in 4Q came from WHB’s full quarter contribution and associate earnings from OCBC’s increased stake in Bank of Ningbo. All in all, WHB contributed $81 million while Bank of Ningbo contribution $64 million, amounting to a approximate 78 percent increase from previous quarter.

Main concerns from the research house were focused on OCBC’s weaker non-II due to lower wealth management fees and net trading income. Against the backdrop of a slowing domestic economy and waned trade loan growth, banks are turning to corporate loan expansions overseas as they seek to grow their loan books. With potential growth in cross border loans and the growing trade flow within Greater China, OCBC WHB and Ningbo contributions will be vital earning drivers in 2015.

Targeting stock price at $11.80, Citi Research remains optimistic on OCBC’s outlook in 2015.

Elaine Lee is a staff writer for Aspire. She is currently pursuing a degree in Economics and Maths with the University of London.

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