Friday, 17 February 2017

COMPARING OUR LOCAL BANKS

This week, all three local banks reported their full year results for 2016. We have summarised the financial results of the banks below:



DBSOCBCUOB
NET INTEREST INCOME (S$M)730550524991
NET INTEREST MARGIN (%)1.81.671.71
NON INTEREST INCOME (S$M)418434373071
NON-PERFORMING LOAN RATIO (%)1.41.31.5
TOTAL ALLOWANCES (S$M)1434726594
NET PROFIT (S$M)423834733096
EARNINGS PER SHARE (S$)1.660.8221.85
DIVIDEND PER SHARE (S$)0.600.360.70
NET ASSET VALUE PER SHARE (S$)16.878.4918.82
  


Expected rate hikes by the US Federal Reserve


The Federal Reserve is expected to raise interest rates three times in 2017, which would benefit the net interest margins of banks. Net interest margin is the difference between the interest earned by the bank from its loans and the interest that it pays for customers' deposits. 

Net interest income makes up a large proportion of the banks' net profit. The upcoming rate hikes would the increase the net interest margin, increasing net interest income, which is positive for banks. 


Non-performing loan ratio should stabilise


Weakness in the oil and gas support services sector remained one of the main concerns due to increased allowances for non-performing loans. We believe that the output cuts by major oil producers should support Brent crude prices within the range of $50 to $60 per barrel. The sustained recovery in oil prices should benefit the oil and gas support services sector, which has been battered by the oil price crash in 2016, resulting in a default by Swiber as well as the ongoing woes of Ezra. 


More room for growth


In 2016, DBS acquired ANZ's wealth and retail business in Asia, while OCBC acquired the investment management business of Barclays Bank in Singapore and Hong Kong. These acquisitions increases the assets under management for the banks.

With increased assets under management, wealth management fees rise. Wealth management income rose 8% year-on-year for UOB and 19% for DBS. OCBC's wealth management fell 3% due to lower contributions from Great Eastern Holdings.


Limited impact from relaxed rules on finance companies


The Monetary Authority of Singapore has relaxed rules for finance companies in Singapore, Hong Leong Finance, Sing Investments & Finance and Singapura Finance, to make it easier for them to provide loans to SMEs. We believe that the impact on banks are limited, given that there is significant brand loyalty from customers. 

The reduced income from SME should not affect banks significantly, given that at DBS, investment banking income from SMEs accounted for only $1.5b out of a total income of $11.5b.


Valuation ratios


DBSOCBCUOB
P/E RATIO11.211.511.5
P/B RATIO1.101.121.13
DIVIDEND YIELD (%)3.23.73.3


We believe that the three local banks are still trading at reasonable valuations of 11x earnings, and we are positive on the banking industry in Singapore.





Disclaimer

This research report is based on information obtained from sources believed to be reliable. AlpacaInvestments does not make any representation or warranty as to its accuracy, completeness or correctness. Whilst we have taken all reasonable care to ensure that the information contained in this publication is not untrue or misleading at the time of publication, you should not act on it without independently verifying its contents. This publication has not been reviewed or authorized by any regulatory authority in Singapore or elsewhere. AlpacaInvestments accepts no liability arising whether directly or indirectly as a result of the recipient acting on such information or opinion or estimate. This report is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. AlpacaInvestments may from time to time have interests in the securities mentioned in this report, and our opinions expressed in this report are subject to change without notice. This report is intended for information purposes only, and should not be regarded as a substitute to your own judgement. 





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