20140825-Maybank_KERPL-New_funding_tool__Covered_bonds_11页_321kb

Singapore Banks Summary

Core Content

Singapore banks may soon be able to issue covered bonds (CBs), a new funding tool that could provide an additional source of long-term, low-cost and stable funding. The issuance of CBs is expected to be up to SGD26 billion, or 3% of their interest-bearing liabilities, and could be introduced as early as year-end. These bonds are secured against a specific asset pool, primarily residential mortgages, and are considered liquid assets under Basel 3. The introduction of CBs is expected to have a marginal impact on EPS and could improve liquidity.

The sector is rated Neutral, with DBS being the top pick due to its strong position to benefit from rising interest rates and strategic leadership. The report also provides peer comparison, valuation data, and key financial ratios for DBS, UOB, and OCBC.

Main Points

• Covered Bonds (CBs): A new funding tool for Singapore banks, expected to be introduced as early as year-end.
• Issue Size: Up to SGD26 billion, or 3% of interest-bearing liabilities.
• Liquidity Impact: CBs could be considered liquid assets under Basel 3, which is positive for liquidity.
• EPS Impact: Expected to be marginal.
• Sector Outlook: Neutral, with DBS as the top pick due to its potential to benefit from higher interest rates.
• Peer Comparison: Includes target prices, price targets, and upside percentages for DBS, UOB, and OCBC.

Key Information

Funding and Liquidity

• CBs are secured against a specific asset pool, primarily residential mortgages.
• The regulatory cap on the amount of assets backing the bonds is 4% of a bank's assets.
• The potential issuance for the three Singapore banks is SGD26 billion, or 3% of their total interest-bearing liabilities.
• The bonds could help improve liquidity in a tightening local market.

Investment Theses

• DBS:

  • Strong leadership under CEO Piyush Gupta.
  • Decent presence in Greater China, well-positioned for economic growth.
  • Key beneficiary of rising interest rates and internationalisation of CNY.
  • Risk to target price: unexpected departure of key personnel.
  • Catalysts: consistent earnings delivery and sharp rise in interest rates.

• UOB:

  • Disciplined and cost-conscious management.
  • Weakest SGD funding profile.
  • Strong focus on liquidity management.
  • Requires all regional operations to be fully funded in local currencies.
  • Risk to target price: ongoing political turmoil in Thailand.
  • Catalyst: sharp rise in interest rates.

• OCBC:

  • Execution risks related to the acquisition of Wing Hang Bank.
  • More volatile earnings due to 87%-owned Great Eastern Holdings.
  • Current management yet to prove itself.
  • Risks to target price: failure to extract operational synergies and capital markets staying depressed.
  • Catalysts: strong pick-up in capital markets and sharp rise in interest rates.

Financial Ratios

• Net Interest Income (NII):

  • DBS: Expected to grow from SGD6,172 million (2014E) to SGD8,604.3 million (2016E).
  • UOB: Expected to grow from SGD4,690.1 million (2014E) to SGD5,926.0 million (2016E).
  • OCBC: Expected to grow from SGD4,480.3 million (2014E) to SGD9,277.1 million (2016E).

• Fee Income:

  • DBS: Expected to grow from SGD2,021.3 million (2014E) to SGD2,536.2 million (2016E).
  • UOB: Expected to grow from SGD1,774.0 million (2014E) to SGD2,036.8 million (2016E).
  • OCBC: Expected to grow from SGD1,454.3 million (2014E) to SGD1,783.1 million (2016E).

• Core Non-Interest Income:

  • DBS: Expected to grow from SGD3,357.9 million (2014E) to SGD4,195.4 million (2016E).
  • UOB: Expected to grow from SGD2,593.9 million (2014E) to SGD2,892.5 million (2016E).
  • OCBC: Expected to grow from SGD3,002.4 million (2014E) to SGD3,489.9 million (2016E).

• Core Operating Income:

  • DBS: Expected to grow from SGD9,529.9 million (2014E) to SGD12,799.8 million (2016E).
  • UOB: Expected to grow from SGD7,284.0 million (2014E) to SGD8,818.5 million (2016E).
  • OCBC: Expected to grow from SGD7,482.8 million (2014E) to SGD9,277.1 million (2016E).

• Overhead Expenses:

  • DBS: Expected to grow from SGD4,254.0 million (2014E) to SGD5,123.9 million (2016E).
  • UOB: Expected to grow from SGD3,193.2 million (2014E) to SGD3,606.4 million (2016E).
  • OCBC: Expected to grow from SGD3,020.6 million (2014E) to SGD3,586.7 million (2016E).

• Core Pre-Provision Profit:

  • DBS: Expected to grow from SGD5,275.9 million (2014E) to SGD7,675.9 million (2016E).
  • UOB: Expected to grow from SGD4,090.8 million (2014E) to SGD5,212.1 million (2016E).
  • OCBC: Expected to grow from SGD4,403.4 million (2014E) to SGD5,630.5 million (2016E).

• Provisions:

  • DBS: Expected to grow from SGD701.2 million (2014E) to SGD968.9 million (2016E).
  • UOB: Expected to grow from SGD639.0 million (2014E) to SGD663.5 million (2016E).
  • OCBC: Expected to grow from SGD285.1 million (2014E) to SGD445.8 million (2016E).

• Core Operating Profit:

  • DBS: Expected to grow from SGD4,574.7 million (2014E) to SGD6,707.0 million (2016E).
  • UOB: Expected to grow from SGD3,451.9 million (2014E) to SGD4,548.7 million (2016E).
  • OCBC: Expected to grow from SGD4,118.4 million (2014E) to SGD5,184.8 million (2016E).

• Core Net Profit (net of preference share dividends):

  • DBS: Expected to grow from SGD3,710.3 million (2014E) to SGD5,615.0 million (2016E).
  • UOB: Expected to grow from SGD3,010.8 million (2014E) to SGD3,907.2 million (2016E).
  • OCBC: Expected to grow from SGD3,175.7 million (2014E) to SGD4,017.7 million (2016E).

• Total Net Loans:

  • DBS: Expected to grow from SGD268,546.3 million (2014E) to SGD321,987.0 million (2016E).
  • UOB: Expected to grow from SGD193,165.4 million (2014E) to SGD235,855.0 million (2016E).
  • OCBC: Expected to grow from SGD181,282.4 million (2014E) to SGD219,333.6 million (2016E).

• Total Assets:

  • DBS: Expected to grow from SGD435,814.4 million (2014E) to SGD528,688.1 million (2016E).
  • UOB: Expected to grow from SGD308,080.2 million (2014E) to SGD369,469.8 million (2016E).
  • OCBC: Expected to grow from SGD362,435.1 million (2014E) to SGD426,898.4 million (2016E).

• Profitability Ratios:

  • Non-Interest Income/Core Operating Income:
    • DBS: Expected to grow from 35.2% (2014E) to 32.8% (2016E).
    • UOB: Expected to grow from 35.6% (2014E) to 32.8% (2016E).
    • OCBC: Expected to grow from 40.1% (2014E) to 37.6% (2016E).
  • Fee Income/Core Operating Income:
    • DBS: Expected to grow from 21.2% (2014E) to 19.8% (2016E).
    • UOB: Expected to grow from 24.4% (2014E) to 23.1% (2016E).
    • OCBC: Expected to grow from 19.4% (2014E) to 19.2% (2016E).
  • Cost/Income:
    • DBS: Expected to grow from 44.6% (2014E) to 40.0% (2016E).
    • UOB: Expected to grow from 43.8% (2014E) to 40.9% (2016E).
    • OCBC: Expected to grow from 40.4% (2014E) to 38.7% (2016E).
  • Cost/Average Assets:
    • DBS: Expected to grow from 1.0% (2014E) to 1.0% (2016E).
    • UOB: Expected to grow from 1.1% (2014E) to 1.0% (2016E).
    • OCBC: Expected to grow from 0.9% (2014E) to 0.9% (2016E).
  • SP/Net Loans:
    • DBS: Expected to grow from 0.2% (2014E) to 0.2% (2016E).
    • UOB: Expected to grow from 0.2% (2014E) to 0.2% (2016E).
    • OCBC: Expected to grow from 0.1% (2014E) to 0.1% (2016E).
  • GP/RWA:
    • DBS: Expected to grow from 1.0% (2014E) to 1.0% (2016E).
    • UOB: Expected to grow from 1.4% (2014E) to 1.4% (2016E).
    • OCBC: Expected to grow from 0.9% (2014E) to 0.9% (2016E).
  • Loan-Deposit Ratio:
    • DBS: Expected to grow from 83.9% (2014E) to 80.8% (2016E).
    • UOB: Expected to grow from 86.9% (2014E) to 85.8% (2016E).
    • OCBC: Expected to grow from 85.7% (2014E) to 85.7% (2016E).
  • Net Loan Growth:
    • DBS: Expected to grow from 8.0% (2014E) to 10.0% (2016E).
    • UOB: Expected to grow from 8.0% (2014E) to 11.0% (2016E).
    • OCBC: Expected to grow from 8.0% (2014E) to 11.0% (2016E).
  • Customer Deposit Growth:
    • DBS: Expected to grow from 9.5% (2014E) to 12.0% (2016E).
    • UOB: Expected to grow from 10.0% (2014E) to 12.0% (2016E).
    • OCBC: Expected to grow from 8.0% (2014E) to 11.0% (2016E).

Valuation Summary

• P/E (x):

  • DBS: Expected to decrease from 26.7 (2010) to 7.9 (2016E).
  • UOB: Expected to decrease from 14.3 (2010) to 9.2 (2016E).
  • OCBC: Expected to decrease from 16.1 (2010) to 8.9 (2016E).

• P/BV (x):

  • DBS: Expected to decrease from 1.6 (2010) to 1.0 (2016E).
  • UOB: Expected to decrease from 1.8 (2010) to 1.2 (2016E).
  • OCBC: Expected to decrease from 1.8 (2010) to 1.2 (2016E).

• P/NTA (x):

  • DBS: Expected to decrease from 1.9 (2010) to 1.2 (2016E).
  • UOB: Expected to decrease from 2.4 (2010) to 1.4 (2016E).
  • OCBC: Expected to decrease from 2.3 (2010) to 1.3 (2016E).

• ROE (%):

  • DBS: Expected to increase from 10.7% (2014E) to 13.7% (2016E).
  • UOB: Expected to increase from 12.0% (2014E) to 13.2% (2016E).
  • OCBC: Expected to increase from 13.1% (2014E) to 13.8% (2016E).

• ROA (%):

  • DBS: Expected to increase from 0.9% (2014E) to 1.1% (2016E).
  • UOB: Expected to increase from 1.0% (2014E) to 1.1% (2016E).
  • OCBC: Expected to increase from 1.1% (2014E) to 1.2% (2016E).

• Dividend Yield (%):

  • DBS: Expected to increase from 3.2% (2014E) to 3.6% (2016E).
  • UOB: Expected to increase from 2.8% (2014E) to 3.3% (2016E).
  • OCBC: Expected to increase from 3.3% (2014E) to 3.3% (2016E).

• BVPS (SGD):

  • DBS: Expected to increase from 11.48 (2010) to 17.54 (2016E).
  • UOB: Expected to increase from 12.53 (2010) to 19.56 (2016E).
  • OCBC: Expected to increase from 5.66 (2010) to 7.89 (2016E).

• Net DPS (cents):

  • DBS: Expected to increase from 56.0 (2010) to 64.0 (2016E).
  • UOB: Expected to increase from 60.0 (2010) to 75.0 (2016E).
  • OCBC: Expected to increase from 30.0 (2010) to 34.0 (2016E).

• Dividend Payout Ratio (%):

  • DBS: Expected to decrease from 48.7% (2010) to 27.9% (2016E).
  • UOB: Expected to decrease from 43.6% (2010) to 30.3% (2016E).
  • OCBC: Expected to decrease from 45.9% (2010) to 29.1% (2016E).

Analyst

• Name: Ng Wee Siang
• Contact: (65) 6432 1467
• Email: ngweesiang@maybank-ke.com.sg

Research Offices

• Regional Head of Institutional Research: WONG Chew Hann, CA
• Regional Head of Retail Research: ONG Seng Yeow
• Institutional Product Manager: Alexander GARTHHOFF
• Chief Economist (Singapore & Malaysia): Suhaimi LIJAS
• Economist / Industry Analyst (Indonesia): Juniman, Josua PARDEDE
• Head of Research (India): Jigar SHAH
• Head of Research (Philippines): Luz LORENZO
• Head of Research (Thailand): Maria LAPIZ
• Head of Research (Singapore): NG Wee Siang
• Head of Research (Indonesia): Wilianto IE
• Head of Retail Research (Thailand): Sukit UDOMSIRIKUL

Conclusion

The introduction of covered bonds is a significant development for Singapore banks, offering a low-cost and stable funding source. It is expected to have a marginal impact on EPS and improve liquidity in a tightening market. The sector is rated Neutral, but DBS is highlighted as the top pick due to its strong leadership, Greater China presence, and position to benefit from rising interest rates. The report also provides detailed financial performance, ratios, and valuation data for DBS, UOB, and OCBC.