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Maybank: Citing Headwinds, Local Banks Are a Sell
Aspire | 24 November 2015
By: Lim Si Jie
Articles (169) Profile

3Q15 was not the best quarter for local banks—the 3Q15 results released this month featured slowing loan growth, minor expansion in lending spreads, weak capital market-related fees and rising credit costs.

The impact of the general slowdown in investment markets continues to put downward pressure on trade fees. However, the heavier drag came from weak investment banking, wealth management and brokerage fees, as equity markets swooned in August.

While the investment sentiment and appetite has recovered slightly in October, 2015 will prove to be a year of two contrasting halves, given the upcoming weak 4Q seasonality and rate hike uncertainties in December.

Unexpected 3Q15 Performance: DBS

3Q15 pre-tax profit was down 18 percent QoQ for consumer and wealth management, five percent QoQ for institutional banking and 44 percent for treasury. “Other income”, which includes corporate, capital and asset management, rose 143 percent, to mitigate the fall in consumer and wealth management.

DBS reported 3Q net profit of $1.066B (-five percent QoQ), which beat expectations with better-than-expected non-interest income, lower provisions as well as a stronger SGD and HKD.

Maintain SELL Until Macro Factors Improve: DBS

That being said, regional consumer sentiment and business prospects remain downcast. USD/HKD strength lifted earnings this quarter but it was mostly translational. Maybank believes that it is too early to jump back into banks until macroeconomic indicators improve.

DBS is sensitive to the repricing interval and the management is expecting more than five percent growth in loans and stable Net Interest Margins (NIMs). While the Fed’s imminent rate hike should augur well for DBS, Maybank foresees NIM to be slightly dented by pressure from China and trade loans.

Maybank is also cautious as restructured Non-Performing Assets (NPAs) went up 12 percent QoQ (nine percent YoY), with increases in the substandard category.

DBS: SELL, TP $16.05

Dismal 3Q15 Performance: OCBC

OCBC’s 3Q15 performance provided minimal reasons to change Maybank’s negative view about the financial services sector.

Key banking metrics point towards a subdued performance:

  1. NIMs (1.66 percent in 3Q15 vs 1.67 percent 2Q15),
  2. Loan growth (+1/+4 percent QoQ/ YoY), and
  3. Asset quality (Non-performing Loans 0.9 percent in 3Q vs. 0.7 percent in 2Q).

Stubbornly weak Oil & Gas sector sparked pre-emptive reviews and restructuring of lending book. This led to an increase in substandard Non-performing Assets (+53 percent QoQ / +70 percent YoY).

Lack of Catalysts: OCBC

Given that OCBC is less sensitive to repricing intervals, large NIMs surprises in 2015/16 look remote with management guiding for NIMs to hover near status quo. In addition, Management indicated that loan growth is expected to be minuscule.

OCBC: SELL, TP $8.65

Consistent 3Q15 Performance: UOB

UOB produced commendable 3Q15 results, topped with a one-off dividend of $0.20 per share to commemorate its 80th anniversary. QoQ total income and net profit grew by 8.2 percent and 12.6 percent respectively. Non-interest income was boosted by gains from sale of Available for Sale securities and stronger trading income.

Consistent 3Q15 Performance: UOB

UOB is sensitive to both repricing interval and credit spreads. Maybank foresees slight upside to NIMs. Management also intends to raise credit spreads in view of weak economic outlook and guided constant currency loan growth of five percent.

Management is optimistic that current provisioning level is adequate for Indonesian NPLs for at least the next 2-3 quarters and looking to selectively add to the Indonesian book. Singapore credit approvals are up for two consecutive quarters.

Among the three local banks, Maybank prefers UOB as it is best positioned to navigate the current cycle.

UOB: HOLD, TP $21.00

Forward Outlook for Banks

The key concern is the extent that credit costs will run up in 2016. 3Q15 special provisions (SPs) were still benign for the three banks, at 11-20 basis points of loans.

There are also concerns of deterioration in the banks’ oil & gas and commodities portfolios, given the commodities down cycle. Asset quality issues have also started to appear in the downstream oil & gas portfolios.

Si Jie is no stranger to investing having started his journey at a young age. He is heavily influenced by acclaimed investors such as Benjamin Graham, Peter Lynch, and John Rothchild.

Please click here for more information about this author.

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