Banking Sector Update: 3Q24 Round-up

Broker Name: UOB Kay Hian

Date of Report: Monday, 11 November 2024

The Race To Work The Balance Sheet Harder

Banks in Singapore delivered a stellar performance in 3Q24, with DBS and OCBC reporting year-over-year (yoy) earnings growth of 15% and 9%, respectively. This impressive showing was driven by a surge in wealth management fees and trading income. With the implementation of the Final Basel III Reforms, banks are now refocusing on capital management. DBS and UOB intend to return surplus capital of S\$3.0 billion and S\$2.5 billion to shareholders, respectively, and OCBC may follow suit. Our top pick is OCBC (Target: S\$21.00) due to its focus on ASEAN. BUY DBS (Target: S\$46.95) for a 2025 yield of 5.7%. Maintain OVERWEIGHT.

What’s New

Wealth Management Fees Charging Ahead

DBS’ fee income surged 32% yoy, outperforming OCBC’s 10% yoy and UOB’s 7% yoy increases. This stellar performance was largely driven by wealth management, with buoyant sentiment generating brisk sales in unit trusts, bancassurance, and structured products. DBS’ wealth management fees grew 55% yoy, followed by 25% yoy growth for both OCBC and UOB.

Record Quarter for Trading Income

Market volatility for foreign exchange and interest rates drove a significant pick-up in customer flow. DBS’ markets trading income doubled yoy to S\$331 million in 3Q24. OCBC’s net trading income increased 135% yoy to S\$508 million, and UOB’s trading and investment income expanded 82% yoy to S\$709 million.

Resilient Asset Quality

DBS and OCBC demonstrated resilient asset quality. DBS’ non-performing loans (NPLs) declined 8% quarter-over-quarter (qoq) in 3Q24 due to sizeable repayments and recoveries of S\$491 million, reducing its NPL ratio from 1.1% to 1.0%. OCBC’s NPLs declined 4% qoq due to higher recoveries and upgrades of S\$260 million, with its NPL ratio remaining unchanged at 0.9%, the lowest among the three banks.

Implementation of Final Basel III Reforms

Singapore banks implemented Final Basel III Reforms starting 1 July 2024. UOB reported a fully phased-in Common Equity Tier-1 (CET-1) Capital Adequacy Ratio (CAR) of 15.2% as of September 2024, representing a sizeable uplift of 1.8 percentage points (ppt) qoq. DBS’ and OCBC’s fully phased-in CET-1 CAR were 15.2% and 15.6%, respectively, similar to levels in 2Q24.

Double Down on Capital Management

The three Singapore banks are refocusing on capital management post-implementation of Final Basel III Reforms:

• DBS: DBS has established a new share buyback programme of S\$3 billion, with shares to be purchased in the open market and cancelled. The programme will reduce the fully phased-in CET-1 CAR by around 0.8ppt when completed. Management opined that DBS still has surplus capital of S\$3-5 billion even after the share buyback programme. They plan to deploy all three engines for capital management: step-up in regular quarterly dividends, special dividends, and share buybacks.
• OCBC: OCBC appears cautious on capital management as existing surplus capital is needed to provide capacity for inorganic expansion and buffer to weather uncertainties. Management will review OCBC’s capital position at the end of 2024. They prefer to return surplus capital to shareholders through a higher dividend payout ratio and paying more regular dividends, rather than buying back shares at above a Price-to-Book (P/B) ratio of 1x.
• UOB: UOB plans to return surplus capital equivalent to 1ppt of its Risk-Weighted Assets (RWA) or S\$2.5 billion back to shareholders. Management is working on an actionable plan for capital management to be announced early next year when it releases its full-year 2024 results.

Action

We maintain an OVERWEIGHT rating on the banking sector, benefiting from increasing optimism of a soft landing for the US economy. Our positive view is also supported by growth in ASEAN economies and strengthening regional currencies. Asset quality remains pristine.

Benefitting from Accelerated Relocation to ASEAN Countries

Trade conflicts between the US and China are likely to resurface, prompting many multinational companies to adopt the China+1 strategy and expand their production facilities within ASEAN, such as Malaysia, Thailand, Indonesia, and Vietnam. OCBC and UOB are beneficiaries of this supply chain repositioning due to their extensive network in ASEAN countries. ASEAN countries, including Singapore, accounted for 48.5% of total loans for DBS, 55.8% for OCBC, and 68.3% for UOB as of June 2024. The region also accounted for 68.3% of total income for DBS, 81.4% for OCBC, and 81.4% for UOB in 1H24.

Headwinds from the Strong SGD Have Abated

MYR, IDR, and THB depreciated 11.3%, 9.4%, and 5.3%, respectively, against the SGD cumulatively in 2022 and 2023, which previously affected contributions from overseas operations. The recent weakening of the SGD against regional currencies in 3Q24, such as the MYR (-8.2%), IDR (-3.3%), and THB (-7.4%), triggered by lower US interest rates, is a welcome relief. Depreciation of the SGD against regional currencies could continue with more upcoming rate cuts.

Banks Provide Attractive and Recurrent Dividend Yield

Banks offer attractive value with a low P/B of 1.28x and a high dividend yield of 5.9% for 2025. Our top pick is OCBC (BUY/Target: S\$21.00) for its commitment to maintaining a dividend payout ratio at 50%, focus on trade and investment flows within ASEAN, and a defensively low 2025F P/B of 1.13x. We also like DBS (BUY/Target: S\$46.95) for its emphasis on capital management.

Company Analysis

DBS Group Holdings (BUY/Target: S\$46.95)

DBS’ fee income surged 31.6% yoy to S\$1,109 million, largely driven by wealth management and structured products. The bank reported a record trading income of S\$331 million, doubling yoy due to market volatility in foreign exchange and interest rates. DBS demonstrated resilient asset quality, with NPLs declining 8% qoq and an NPL ratio falling from 1.1% to 1.0%. The bank implemented Final Basel III Reforms with a fully phased-in CET-1 CAR of 15.2% as of September 2024.

DBS has established a new share buyback programme of S\$3 billion, which will reduce the fully phased-in CET-1 CAR by around 0.8ppt when completed. Management plans to deploy all three engines for capital management: step-up in regular quarterly dividends, special dividends, and share buybacks. Leadership transition is underway, with Tan Su Shan, current Group Head of Institutional Banking, appointed as Deputy CEO and set to succeed Piyush Gupta as CEO at the next AGM on 28 March 2025. Our target price for DBS of S\$46.95 is based on 1.95x 2025F P/B, derived from the Gordon Growth Model (ROE: 14.9%, COE: 8.5%, growth: 1.8%).

Oversea-Chinese Banking Corp (BUY/Target: S\$21.00)

OCBC’s fee income grew 10.2% yoy to S\$508 million, driven by wealth management and bancassurance. The bank reported a record trading income of S\$508 million, up 135% yoy, and demonstrated resilient asset quality with an NPL ratio of 0.9%, the lowest among the three banks. OCBC implemented Final Basel III Reforms with a fully phased-in CET-1 CAR of 15.6% as of September 2024.

Management aims to deliver incremental revenue of S\$3 billion cumulatively over 2023-25, driven by four growth pillars: Asian wealth, trade and investment flows, new economy, and sustainable financing. OCBC had the highest fully phased-in CET-1 CAR of 15.6% and the lowest NPL ratio of 0.9% as of June 2024. Our target price for OCBC of S\$21.00 is based on 1.60x 2025F P/B, derived from the Gordon Growth Model (ROE: 12.7%, COE: 8.5%, growth: 1.5%).

United Overseas Bank (UOB)

UOB’s fee income increased 6.6% yoy to S\$630 million, with trading and investment income expanding 82% yoy to S\$709 million. The bank reported an NPL ratio of 1.5% and implemented Final Basel III Reforms with a fully phased-in CET-1 CAR of 15.2% as of September 2024. UOB plans to return surplus capital equivalent to 1ppt of its RWA or S\$2.5 billion back to shareholders, with an actionable plan for capital management to be announced early next year.

Projected DPS and Dividend Payout Ratios

Comparison of Profit & Loss

Comparison of Key Ratios

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