Industry Focus Refer to important disclosures at the end of this report DBS Group Research. Equity 28 Oct 2014 A new landscape Greater China contribution to play an increasing role Merged OCBC-WHB, a new differentiator vs. UOB Is the rate hike for real this time? Still prefer OCBC to UOB Emerging returns from Greater China. Although we believe ASEAN operations will continue to be an important growth driver for the banks, returns from Greater China would feature going forward. This would be driven by the newly merged OCBC-WHB. On average, banks derive 19% of their pre-tax profit from Greater China, which, post OCBC-WHB, should rise to 23%. Uncertainties in Indonesia may drag for a couple more quarters, while contribution from Malaysian operations should remain fairly stable. Merged OCBC-WHB, a new differentiator to UOB. Previously, OCBC s key earnings differentiator to UOB was its visibility in non-interest income, particularly insurance and wealth management. OCBC s acquisition of WHB has moved it another step ahead of UOB with higher anticipated contribution from Greater China. Is the rate hike for real this time? The heat is on for interest rates to start rising towards 2H15. The quantum is expected to be larger in Hong Kong vs and WHB is poised to be a beneficiary of a rate hike in Hong Kong; this would be a net positive for OCBC vs UOB. Rate hikes aside, the banks have seen NIM stabilise over the past 6 months and rising trends are a possibility barring the ability of the banks to manage funding costs well. While OCBC s NIM improved in 1Q14, it stabilised in 2Q14. UOB however disappointed when it came to NIM, and we continue to see pressure ahead. Overall, we expect NIM to end the year higher than in 2013 and we have pencilled in a slight increase in NIM for 2015. Still prefer OCBC to UOB. OCBC remains our preferred pick. After incorporating WHB in our OCBC forecasts and rolling over our valuation base to FY15, our TP for OCBC is S$12.70, implying 1.4x enlarged FY15F BV based on the Gordon Growth Model (12% ROE, 6% growth, 10.2% cost of equity). Similarly, by rolling over the valuation base to FY15 for UOB, we derive a new TP of S$23.10 which implies 1.3x FY15F BV based on the Gordon Growth Model (12% ROE, 5% growth, 10.1% cost of equity). Our preference for OCBC is premised on its enlarged presence in Greater China which has greater growth potential coupled with its superior non-interest income franchise in wealth management and insurance, while an added edge in Malaysia would be its Islamic banking arm. STI : 3,226.11 Analyst LIM Sue Lin +603 2604 3969 suelin@alliancedbs.com STOCKS DBS 18.35 35,595 NA 1.8 10.5 NR OCBC 9.78 30,133 12.70 3.3 (3.3) BUY UOB 21.78 27,346 23.10 (8.0) 4.8 HOLD Source: AllianceDBS : Regional profit contribution (1H14) DBS UOB Greater China 9% Indonesia 2% Thailand Malaysia 16% Hong Kong 23% Other 7% South/South Rest of the Rest of Greater China 8% East Asia 3% World 6% 62% 63% OCBC Indonesia Malaysia 19% Malaysia 11% Greater China 11% Asia Pacific 2% Rest of the World Total Rest of the World 6% Others Indonesia 3% Greater China 19% Source: Companies, AllianceDBS : Will NIM trends continue to rise? 3m SIBOR % 0.70 0.60 0.50 0.40 0.30 0.20 0.10-1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 3M Sibor DBS NIM UOB NIM OCBC NIM Source: Companies, AllianceDBS Price Mkt Cap Target Price Performance (%) S$ US$m S$ 3 mth 12 mth Rating 60% 62% Bank NIMs % 2.30 2.20 2.10 2.00 1.90 1.80 1.70 1.60 1.50 www.dbsvickers.com ed: JS / sa: JC
Emerging returns from Greater China Opportunities await. banks have been embarking on the onshore-offshore strategy with respect to their Greater China operations for a while now. Over the past two years, we have seen banks gravitating towards stamping a presence in Greater China via trade finance, which has bode well for NIM, fee income and earnings. That said, most of these businesses are done offshore rather than onshore. We believe that banks are still more comfortable with their Greater China offshore businesses rather than onshore. Both Hong Kong and banks have benefitted from cross-border trades with Chinese companies particularly China relationships that are looking to expand into ASEAN, both on rising trade flows and FDIs. For the banks, the majority, if not all of their Greater China businesses are wholesale in nature. With WHB, OCBC can now tap into the retail and SME business in Hong Kong and Macau. WHB s additional advantage is derived from its Closer Economic Partnership Agreement (CEPA) with a Southern China presence. Sing Banks: Regional strategies OCBC s rationale to acquire WHB. This backs the argument why OCBC went ahead to acquire WHB. OCBC s acquisition of WHB is in line with its Greater China regional expansion strategy. Given the mega trends in Asia, OCBC believes the acquisition is necessary to give it a large footprint in Greater China. WHB is one of the few larger Hong Kong banks that was available in the market, and its shareholders were already looking to sell out for some time. The acquisition allows OCBC to deepen its capabilities in Greater China and given that Hong Kong is the latest offshore Rmb market, Hong Kong also has the largest pool of offshore Rmb deposits. OCBC would also benefit from wider prospects for its wealth management and insurance business in Greater China. There should also be substantial cross-selling opportunities going forward. Emerging returns from Greater China. Although we believe ASEAN operations will continue to be an important growth driver for the banks, emerging returns from Greater China would feature going forward. This would be driven by the newly merged OCBC-WHB. On average, banks derive 19% of pre-tax profits from Greater China, which, post-ocbc-whb, should be lifted to 23%. Uncertainties in Indonesia may drag for a couple more quarters, while contribution from Malaysian operations should remain fairly stable. OCBC: Pre-tax profit breakdown (2013 proforma) UOB Malaysia 16% Greater China 9% Indonesia 2% Thailand Other 7% OCBC Indonesia Malaysia 19% Greater China 11% Asia Pacific 2% Rest of the World 62% 60% DBS South/South Rest of the Rest of Greater China 8% East Asia 3% World 6% Total Greater China 19% Rest of the World Indonesia 3% 6% Others Hong Kong 23% Malaysia 11% 63% 62% Source: Company; AllianceDBS Source: Bank websites Page 2
The big-bang from OCBC-WHB Incorporating WHB. We are imputing 5 months of WHB s forecast into our FY14F earnings in addition to mildly nudging our stand-alone estimates for OCBC; FY14F appears to be a swell year with ROE expected to reach 12.6%. However, full impact of the rights issue would be felt in the FY15-16F financials with its enlarged equity base. We expect ROE to gradually edge towards 12% by FY16F. Our forecast for WHB does not include potential synergies from the merger as we merely added financials of the two entities. OCBC-WHB: Proforma FY14-16F forecasts FY14F FY15F FY16F Prev Rev %chg Prev Rev %chg Prev Rev %chg Net int inc 4,441 4,998 13% 4,949 5,791 17% 5,442 6,365 17% Non-int inc 2,900 3,124 8% 3,094 3,522 1 3,304 3,836 16% Optg exp (3,142) (3,291) 5% (3,450) (3,867) 12% (3,763) (4,170) 11% Pre-prov profit 4,200 4,832 15% 4,593 5,446 19% 4,983 6,030 21% Pre-tax profit 2,999 4,599 53% 3,254 5,140 58% 4,550 5,642 2 Net profit 2,999 3,564 19% 3,254 3,993 23% 3,516 4,387 25% Net profit (after Pref) 2,917 3,482 19% 3,172 3,911 23% 3,434 4,305 25% Source: AllianceDBS What can WHB bring to the table? In addition to an immediate boost in presence in Greater China (the enlarged OCBC group will have a combined network of 31 branches and sub-branches in 13 cities in China), the winning factor in our view would be WHB s SME and retail banking business given that OCBC s existing Greater China business focuses mainly on corporate banking. WHB is one of the larger banks that has a focus on SMEs. WHB is able to provide comprehensive service packages, including Rmb trade settlements and cross border solutions with its branches in Guangdong and Macau, pension and payroll services etc, when compared to smaller competitors like Chong Hing Bank. WHB s pricing is also more attractive than the larger banks, which tend to price loans or services at a slight premium due to their larger network. HK also has a SME loan guarantee scheme, where the HK government will guarantee loans of up to HK$12m for qualifying SMEs to borrow through banks like WHB. WHB also has a well-established auto and equipment financing business in Hong Kong. WHB s retail business is largely mortgages and consumer finance via Wing Hang Credit. In Macau, WHB has a well entrenched position in mortgage and auto loans. What the merger could bring cross-selling opportunities. Combined, both OCBC and WHB will be able to leverage on each other s strengths which are complementary, in our view. We believe the key takeaway which will bring great benefit to OCBC would be its ability to build a deposit funding base in US$ and Rmb. This is in addition to both banks now able to fill the gaps for OCBC s current core business focus on wealth management, and retail & commercial banking and insurance. More importantly, with Greater China presence, OCBC s growth prospects in the abovementioned areas are further enhanced. We believe active cross-selling for OCBC s private banking and insurance businesses will be key wins. We have not imputed such synergies in our forecasts. But, management did guide for some S$40-50m integration costs, which we have imputed. Additional boost from rate hikes in HK. This was an inherent risk when acquiring a Hong Kong bank especially with respect to HK$ deposits. However, with an anticipated rate hike in Hong Kong as US$ interest rates start to normalise in 2H15, a view that our economist and strategist are taking, this works out positively for WHB. WHB s earnings would be most sensitive to interest rates movements as its earnings are more dependent on interest income when compared to its Hong Kong banking peers. WHB vs Hong Kong bank peers: Interest rate sensitivity (for every 10bps increase in broad interest rates) Est. chg in Net int inc (HK$ m) Hang Seng Bank Bank of China Hong Kong Bank of East Asia Wing Hang Bank Dah Sing Banking Group 220 323 82 37 30 % of net int inc 1.2% 1.2% 0.7% 1.1% 1.1% % of net profit 1.3% 1.5% 1.3% 1.7% 1.7% Source: DBS Vickers; AllianceDBS Rate hike for banks is a catalyst, but impact would be muted. We are also expecting a possible rate hike scenario in but the impact would be muted (see pg 6 for analysis of interest rate hikes on banks). Between OCBC and UOB, OCBC would be in a better position to benefit from a rate hike given its more liquid S$ position. Reigniting capital levels. The acquisition was funded by a combination of US$ sub-debt (US$2bn), scrip dividend (S$486m) and the proposed rights issue (S$3.3bn). The rights issue and scrip dividend would at least keep OCBC s CET1 ratio above 10% in the near term. Our proforma estimates suggest that OCBC would be able to build up its CET1 towards 12-13% by FY15-16F assuming a sustainable 40% dividend payout combined with a scrip dividend scheme under the assumption of an 80% take up rate. Further divestment of non-core assets will aid in its capital buffer. Page 3
OCBC-WHB: Proforma capital ratios post capital raising FY13A FY14F FY15F FY16F CET1 (fully loaded) 10.7% 10.3% 11.7% 12.8% Tier-1 CAR 14.6% 13. 14.6% 15.6% Total CAR 16.3% 15.8% 16.9% 17.7% Source: Company, AllianceDBS Non-core asset divestments. OCBC stated that it would divest non-core assets as part of its capital management to ensure sufficient ammunition for growth over and above its scrip dividend. OCBC mentioned clearly that it would not be divesting any of its financial assets including properties related to its financial operations; only those which are non-financial related would likely be divested. Judging from the list of major properties that were listed in OCBC s 2013 annual report, we estimate that it could divest up to RM1,147m worth of properties. Taking this into our FY15F earnings, this could lift capital ratios by an additional 60bps. OCBC was in the limelight in the privatisation of United Engineers but judging from its direct stake, the impact would be negligible. We believe OCBC would not be able to book the portion that is held by Great Eastern Holding s non-par fund. OCBC: List of major properties (market value) Market Value S$ m Offices (collectively) 2,221.60 What UOB has done UOB s FDI Advisory Unit. UOB launched its FDI Advisory Unit in Oct 2011 to ride on increased global FDI flows into the region. Its FDI centres include China and Hong Kong apart from its ASEAN operations. From inception to date, the UOB FDI Advisory team has engaged close to 600 foreign companies globally, with 55% of them becoming UOB customers and of which 5 are from China. This compares to OCBC s China Business Office which was established in in 2012 with the aim of supporting its Chinese customers as they venture into and the region, facilitating their cross-border trades, treasury, and capital flows, and investment banking activities. UOB had also in previous quarters articulated that it had been giving out corporate loans in Hong Kong, which we believe were opportunistic as well. However, over the longer term, a larger presence in Hong Kong and China would be warranted to garner a larger share of the market. UOB: UOB FDI Advisory milestone Residential Tanjong Rhu, The Waterside 265.8 Mt Elizabeth Link 190.0 1,147 The Compass at Chancery 52.0 = S$0.30 EPS Valley Lodge 21.0 = 60bps capital Retail & Hotel 277 Orchard Road 618.0 Total () 3,368.4 Malaysia (Office) 49.3 Indonesia (Office) 21.3 China (Office) 196.5 Other properties (region) 1,156.3 If these can be sold, there could be another S$0.31 added to EPS/60bps to capital Total 4,792 Source: OCBC 2013 Annual Report Source: Bank website Pressure for acquisitions ahead? UOB has been disciplined in considering opportunities for expansion. It has not been on a massive M&A path since it last acquired OUB in 2001. UOB acquired a 15% stake in China s Evergrowing Bank in 2008 but contribution is negligible. With its peers already having made a headway in Greater China, we would not discount that UOB could be under pressure to acquire to spruce up its Greater China business. UOB s official stance remains that its growth path in Greater China would be organic but it remains on a look out for opportunities. Page 4
Earnings momentum 3Q14 results preview. While on the surface, 3Q14 may appear to be a relatively subdued quarter, we would look out for the following key trends: (1) NIM will this be sustainable?, (2) positive surprises in fee income 1H14 s non-interest income was already better than expected; will the trend persist?, (3) funding and liquidity trends overall loan-to-deposit ratio and S$ loan-to-deposit ratio. OCBC s 3Q14 earnings may be distorted as it would include approximately 2 months of WHB s numbers in it. The acquisition was completed in end July and WHB was then renamed OCBC- WHB and considered a subsidiary of OCBC. Nevertheless, on a stand-alone basis, we expect NIM to remain stable, provisions and NPLs to remain low. Meanwhile, its insurance income contribution should remain on a positive traction. Trading and investment income would likely be slower in 3Q14. UOB: Fee income improvement provides a glimmer of hope. UOB s 3Q14 earnings trend would be pretty similar to 2Q14. Focus remains on funding and liquidity. Funding pressure is still expected for its regional operations. Hence, NIM could still slide a little. A flat NIM would be the best case scenario. Positively, fee income is expected to improve in 3Q14. It was mentioned during the 2Q14 results that fees derived from regional mandates are lumpy. The pipeline for 2H14 is better compared to 1H14 where there was virtually no growth in fee income. Elsewhere, NPLs may remain an issue that UOB would have to contend with. Recall that in 2Q14, there were blips in its mortgage NPLs. This arose from a single development project with cash flow issues. While NPL ratios may be a little dented, provisions are not expected to be affected. UOB has always been conservative in setting aside provisions. UOB remains the bank with the highest general provision reserve ratio at 1.. Overall loan growth should be subdued. Overall, we expect the banks to end the year with close to 11% loan growth. UOB should see slower loan growth trend in 3Q14 following 1H14 s strong 6% loan growth. OCBC should continue to track 3- q- o-q, which includes WHB. banks: Quarterly NIM trends 2.50% 2.40% 2.30% 2.20% 2.10% 2.00% 1.90% 1.80% 1.70% 1.60% 1.50% 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 Source: Companies, AllianceDBS DBS UOB OCBC Average banks: Non-interest income trends S$m 1200 1000 800 600 400 200 0 UOB, 1.71% OCBC, 1.70% Average, 1.70 DBS, 1.67% DBS UOB OCBC OCBC (ex-geh) Source: Companies, AllianceDBS 2Q13 3Q13 4Q13 3Q12 1Q14 2Q14 banks: Provision charge-off rates 0.50% 0.40% 0.30% 0.20% 0.10% 0.00% -0.10% 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 DBS UOB OCBC Source: Companies, AllianceDBS Page 5
Are rate hikes for real this time? If there is a hike, it would be in 3Q15. Our interest rate strategist has penciled a rate hike for both and Hong Kong in 3Q15. The relative increase appears to be higher for the 3m HIBOR vs the 3m SIBOR. Nevertheless, rate hikes are typically positive for both and Hong Kong banks. However, this would be offset with a likely rise in provisions. We believe the banks will be able to withstand a rate hike given that unemployment remains low. Positively, even without a SIBOR hike, the banks are already seeing improvements in NIM. A rate hike would be a bonus to banks. In Hong Kong, our analyst expects asset quality issues spurred by interest rate increases to be modest due to our outlook for residential property prices; our analysis suggests a mild correction in prices as long as salary growth remains on an upward trajectory. Our analysis on NIM going forward would need to consider trends in Hong Kong due to the increased exposure via OCBC-WHB. WHB s mortgage loans to total loans stood at 19% as at end- 1H14. Rate hike expectation from 3Q15 of a mere 5bps imputed in our FY15 forecasts. We have imputed 5bps SIBOR hike in our FY15F earnings but our NIM assumptions are more skewed towards improved asset yields and easing funding cost pressures rather than a full impact from a rate hike. Based on our estimates, every 10bps increase in broad interest rates would raise earnings by 3%, but this assumes that there is no dynamic effort to manage liquidity and balance sheet. A more meaningful sensitivity would be for a 10bps increase in NIM, leading to an earnings lift by 5-7% bank: Interest rate sensitivity (for every 10bps increase in broad interest rates) UOB OCBC Est. chg in net int inc (S$ m) 85 114 % of net int inc 1.7% 1.9% % of net profit 2.5% 2.8% Source: DBS Vickers; AllianceDBS Banks with higher CASA and lower domestic currency loan-todeposit ratio should benefit the most. As CASA rates are rarely priced up, an interest rate hike would benefit banks with a higher CASA to total deposits. This puts OCBC at an advantage to UOB. In addition, OCBC s S$ loan-to-deposit ratio is also lower compared to UOB, which hit a high of 100% in 2Q14. Should these trends persist, excess S$ liquidity would be easily re-priced when SIBOR inches up. In the case of WHB, although its CASA is much lower compared to peers, but because it relies more on interest income rather than fees, its earnings tend to be more sensitive to rate changes. : NIM vs SIBOR 3m SIBOR % 4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 - Bank NIMs % 1Q02 2Q02 3Q02 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 Source: Companies, AllianceDBS 3M Sibor DBS NIM UOB NIM OCBC NIM : Unemployment rate vs asset quality indicators % Total persons 3.5 80000 70000 3.0 60000 2.5 50000 2.0 40000 1.5 30000 20000 1.0 10000 0.5 0 0.0-10000 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Unemployment rate (LHS) NPL ratio (LHS) Source: MOM, AllianceDBS Provision charge-off rate (LHS) Job creation (RHS) : CASA to total deposits and S$ loan-todeposit ratio 100% 80% 60% 40% 20% 0% DBS, 77% 59% 60% 60% 60% 61% 59% 58% 55% 56% 56% 46% 46% 47% 51% 51% 50% 49% 47% 47% 47% 41% 41% 41% 41% 42% 42% 41% 42% 42% 42% 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 DBS CASA to total deposits OCBC CASA to total deposits UOB CASA to total deposits DBS S$ loan-to-deposit ratio OCBC S$ loan-to-deposit ratio UOB S$ loan-to-deposit ratio Source: Companies, AllianceDBS 2.70 2.50 2.30 2.10 1.90 1.70 1.50 UOB, 100% OCBC, 82% Page 6
Valuation and recommendation Still prefer OCBC to UOB. While we have been bullish on OCBC since the announcement of its acquisition of WHB, which was a non-consensus call, consensus has since caught up with the completion of the acquisition. We remain positive on OCBC as it starts to shape itself post-acquisition. While there appears to still be skeptics, though way fewer now in our view, we believe targets set by management, especially towards EPS-ROE accretion by 2017, is reasonable. We have merely merged OCBC and WHB s numbers without imputing synergies except for the guided S$40m integration cost to be incurred in FY15F. Based on these assumptions, we forecast ROE to hit 12% by then. Positive surprises should emerge as synergies become visible. banks valuations inching up to +1SD of mean. The banks have been struggling to reach +1SD of mean valuations since late 4Q13. From an ASEAN perspective, banks valuations are an attractive bargain but compared to its Thai peers, catalysts are not exciting. Over the next few quarters, we believe focus would be on OCBC as it gradually extracts synergies from WHB. We see limited catalysts for UOB given regional headwinds it would be facing in the near term. : Rolling forward PB band x 1.7 1.5 1.3 1.1 0.9 0.7 0.5 03 04 05 06 07 08 09 10 11 12 13 14 Sources: Companies, Bloomberg Finance L.P., AllianceDBS +2 SD, 1.47 +1 SD, 1.26 Mean, 1.05-1 SD, 0.85-2 SD, 0.64 Rolling over valuation base to FY15F. Our TPs for UOB and OCBC are raised as we roll forward our valuation base to FY15F. New TP for UOB is S$23.10 which implies 1.3x FY15BV based on the Gordon Growth Model (12% ROE, 5% growth 10.1% cost of equity) but our rating is kept at HOLD. Our new TP for OCBC after including WHB is S$12.70 which implies 1.4x FY15F enlarged book value based on the Gordon Growth Model (12% ROE, 6% growth, 10.2% cost of equity). Our BUY recommendation for OCBC is maintained. Page 7
ASEAN Banks: Peer valuation FYE Mkt Price Target Share Price Avg CAGR PE P/BV Dividend Yield ROE Bank Cap (LCY) Price % Performance (%) 6-mth 13-15 (x) (x) (%) (%) (US$m) 10/27/2014 (LCY) Upside Rcmd YTD 1M 3M 6M 12M Vol (m) (%) 13A 14F 15F 13A 14F 15F 13A 14F 15F 13A 14F 15F DBS* Dec 35,595 18.35 NA NA NA 7-1 2 10 11 3.5 8 12.1x 11.4x 10.5x 1.3x 1.2x 1.1x 3.2% 3.3% 3.3% 11.3% 11.2% 11.3% OCBC Dec 30,133 9.78 12.70 30% Buy -1 1 3 6-3 4.2 15 12.9x 10.3x 9.7x 1.4x 1.2x 1.1x 3. 3.7% 4.2% 11.5% 12.5% 11.8% UOB Dec 27,346 21.78 23.10 6% Hold 3-4 -9-2 5 2.0 6 11.8x 11.5x 10.6x 1.4x 1.3x 1.2x 3. 3.5% 3.6% 12.3% 11.9% 12.0% Weighted average 10 12.3x 11.1x 10.3x 1.4x 1.2x 1.2x 3.3% 3.5% 3.6% 11.7% 11.8% 11.7% Simple average 10 12.3x 11.1x 10.3x 1.4x 1.2x 1.2x 3.3% 3.5% 3.7% 11.7% 11.8% 11.7% Malaysia Affin Holdings Dec 1,940 3.27 3.70 13% Hold -17-3 -7-8 -18 0.5-7 7.5x 11.1x 8.7x 0.8x 0.8x 0.8x 4.6% 3.1% 4.0% 10.5% 8.0% 8.9% Alliance Financial Group* Mar 2,265 4.79 NA NA NA 1-4 -4 9-7 2.1 8 13.7x 12.7x 11.7x 1.9x 1.7x 1.6x 3. 4.5% 4.9% 13.8% 13.7% 13.8% AMMB Holdings Mar 6,195 6.73 7.50 11% Hold -7-2 -4-6 -10 3.3 0 12.4x 11.4x 12.3x 1.7x 1.5x 1.4x 3.3% 3.6% 3.7% 14.1% 14.2% 13.7% CIMB Group Dec 15,708 6.17 7.50 22% Hold -19-12 -11-18 -19 6.3 5 11.6x 11.4x 10.5x 1.6x 1.4x 1.3x 3.9% 3.7% 4.2% 16.0% 13.2% 12.9% Hong Leong Bank Jun 7,867 14.32 17.60 23% Buy -1-1 2 2 0 0.8 11 14.5x 12.8x 11.7x 2.1x 1.9x 1.7x 2. 2.9% 3.0% 15.2% 15.3% 15.0% Maybank Dec 27,053 9.68 11.80 22% Buy -3-2 -2-3 -3 7.5 5 12.8x 12.6x 11.5x 1.9x 1.7x 1.7x 5.5% 5.5% 6.0% 14.9% 14.1% 14.5% Public Bank Dec 21,934 18.60 22.60 22% Buy -1-2 -6-5 4 6.1 5 16.1x 16.2x 14.5x 3.2x 2.6x 2.4x 2.8% 3.0% 3.1% 21.3% 18.6% 17.2% RHB Capital Dec 6,850 8.72 10.00 15% Buy 10-2 -3 5 9 1.4 13 12.0x 10.7x 9.4x 1.3x 1.2x 1.1x 1.9% 2.8% 3.1% 11.5% 11.8% 12. BIMB Holdings Dec 1,957 4.29 4.50 5% Hold -6-1 -1 0-11 0.9 38 21.5x 12.3x 11.3x 2.4x 2.2x 2.0x 2.0% 4.1% 4. 10.8% 18.3% 18.1% Hong Leong Financial Group Dec 5,671 17.64 19.40 10% Buy 14 2 1 18 15 0.3 12 12.5x 10.9x 9.9x 1.8x 1.6x 1.5x 2.0% 2.2% 2. 16.1% 15.8% 15.6% Weighted average (ex-hlfg) 7 13.9x 13.3x 12.2x 2.1x 1.9x 1.7x 3.8% 4.1% 4. 16.5% 15.3% 15.0% Simple average (ex-hlfg) 9 11.8x 10.9x 10.3x 1.7x 1.6x 1.5x 3.7% 3.6% 3.7% 14.3% 13.8% 13.6% Indonesia Bank Central Asia Dec 26,997 13,175 11,100-16% Hold 37 3 14 24 23 12.6 15 22.8x 20.0x 17.3x 5.1x 4.3x 3.6x 0.9% 1.3% 1.5% 24.6% 23.3% 22.8% Bank Danamon* Dec 3,210 4,030 NA NA NA 7 2 5-6 -2 3.4-2 9.3x 11.6x 6.9x 1.2x 1.1x 1.0x 2.8% 2.8% 2.9% 13.5% 10.0% 10.8% Bank Mandiri Dec 19,344 9,975 10,600 6% Hold 27-1 -3 2 13 27.3 12 12.8x 12.2x 10.2x 2.7x 2.4x 2.0x 2.3% 2.7% 2.9% 22.5% 20.6% 21.6% Bank Negara Indonesia Dec 8,835 5,700 5,800 2% Hold 44 4 12 15 19 26.4 14 11.7x 10.3x 9.0x 2.2x 1.9x 1.7x 2.0% 2.6% 2.9% 19.9% 20.0% 19.9% Bank Rakyat Indonesia Dec 21,631 10,550 11,600 10% Buy 46 2-6 7 25 31.4 13 12.2x 10.8x 9.5x 3.3x 2.6x 2.1x 1.6% 1.9% 2.1% 29.7% 26.9% 24.6% Bank Tabungan Negara Dec 997 1,135 940-17% Fully Valued 30 0 5-3 15 47.4 0 7.5x 11.3x 7.5x 1.0x 1.0x 0.9x 3.5% 4.0% 2.7% 14.3% 8.8% 12.3% Bank Tabungan Pensiunan Nasional Dec 2,155 4,440 5,200 17% Buy 3-3 7 9 8 0.2 4 11.8x 11.9x 10.9x 2.5x 2.1x 1.8x 0.0% 0.0% 0.0% 24.2% 19.2% 17.5% Panin Bank Dec 1,942 970 1,100 13% Buy 47 3 10 12 33 3.1 16 10.3x 9.4x 7.7x 1.3x 1.1x 1.0x 0.0% 0.0% 0.0% 12.9% 12.7% 13.5% Bank Jabar Banten* Dec 596 740 NA NA NA -17-7 -11-25 -20 16.3-6 5.2x 6.8x 4.0x 1.1x 1.0x 0.9x 8.8% 8.8% 8.5% 21.7% 15.9% 16.9% Bank Jatim* Dec 533 430 NA NA NA 15-1 1-11 12 9.1 19 8.0x 6.2x 4.5x 1.2x 1.1x 1.0x 9.0% 11.3% 11.2% 14.7% 17.8% 18.9% Bank Bukopin* Dec 574 760 NA NA NA 23 3 6 20 15 7.4 2 6.2x 6.7x 6.0x 0.9x 0.9x 0.8x 3.6% 3.6% 3.8% 16.0% 16.0% 16.8% Weighted average 13 15.4x 14.0x 12.0x 3.4x 2.9x 2.4x 1.6% 1.9% 2.1% 24.1% 22.2% 21.8% Simple average 9 12.3x 12.2x 9.9x 2.4x 2.1x 1.8x 1.6% 1.9% 1.9% 20.2% 17.7% 17.9% Weighted average (ex-bbca) 12 12.0x 11.2x 9.5x 2.7x 2.2x 1.9x 1.9% 2.2% 2. 23.9% 21.8% 21.3% Simple average (ex-bbca) 8 10.8x 11.1x 8.8x 2.0x 1.7x 1.5x 1.7% 2.0% 1.9% 19.6% 16.9% 17.2% Indonesia multifinance BFI Finance Dec 258 2,000 3,100 55% Buy -20-16 -5-9 19 0.2 13 6.0x 5.4x 5.9x 0.9x 0.8x 0.7x 0.0% 7.0% 8.1% 16.3% 15.7% 16. Clipan Finance Dec 138 430 490 1 Hold 8-2 3 7 1 0.7 14 4.2x 3.9x 3.0x 0.6x 0.5x 0.5x 4.2% 5.1% 6.2% 15.0% 14.2% 15.3% Weighted average 13 5.3x 4.9x 4.9x 0.8x 0.7x 0.6x 1.5% 6. 7.5% 15.8% 15.2% 16.0% Simple average 13 5.1x 4.7x 4.4x 0.7x 0.7x 0.6x 2.1% 6.1% 7.2% 15.6% 15.0% 15.9% Thailand Bank of Ayudhya Dec 8,481 45.25 NA -3 NR 48-10 -10 17 18 0.5 27 19.6x 15.8x 12.1x 2.3x 2.0x 1.8x 1.8% 2.1% 2.8% 12.0% 13.6% 15.9% Bangkok Bank Dec 11,515 195.50 254.00 30% Buy 10-6 0 3-4 5.9 4 10.4x 10.5x 9.6x 1.3x 1.1x 1.0x 3.3% 3.3% 3.6% 12.6% 11. 11.3% KASIKORNBANK Dec 17,428 236.00 290.00 23% Buy 51 0 16 25 27 5.5 12 13.7x 12.2x 10.9x 2.6x 2.2x 1.9x 1.5% 1.7% 1.9% 20. 19.3% 18. Krung Thai Bank Dec 9,660 22.40 30.00 3 Buy 36-7 2 22 11 52.0 9 9.2x 8.8x 7.8x 1.5x 1.3x 1.2x 3.9% 4.0% 4.2% 17.5% 16.3% 16. Siam Commercial Bank Dec 18,067 172.50 235.00 36% Buy 20-7 -3 4 7 6.1 11 11.7x 10.5x 9.5x 2.4x 2.0x 1.8x 3.0% 3.2% 3.3% 21.8% 20.7% 19.7% Thanachart Capital Dec 1,275 34.25 36.00 5% Hold 6-9 -3 1-1 3.3-19 4.8x 7.9x 7.3x 0.9x 0.8x 0.8x 4.7% 4. 5.0% 13.6% 10.6% 10.6% Tisco Financial Group Dec 1,062 43.00 44.00 2% Hold 12-7 4 3-2 1.1-3 7.9x 8.7x 8.3x 1.3x 1.4x 1.2x 5.1% 4.7% 5.2% 20.6% 16.3% 15. Thai Military Bank Dec 4,097 3.04 3.60 18% Buy 48-16 -16 23 55 219.0 34 23.1x 15.4x 12.8x 2.1x 1.9x 1.7x 1.3% 1.6% 2.0% 9.6% 13.2% 14.2% Kiatnakin* Dec 1,184 42.25 NA NA NA 11-7 -7 11-14 1.8-4 7.8x 11.5x 8.6x 1.0x 1.0x 0.9x 6. 4.6% 5.8% 13.0% 8.8% 10.8% Weighted average 12 12.9x 11.5x 10.1x 2.0x 1.8x 1.6x 2.7% 2.8% 3.1% 17.3% 16.6% 16.5% Simple average 8 12.0x 11.3x 9.7x 1.7x 1.5x 1.4x 3. 3.3% 3.8% 15.7% 14.5% 14.7% Philippines Bank of Philippine Islands Dec 8,330 94.90 98.00 3% Hold 14-3 0 4-3 1.6 3 18.3x 19.5x 17.2x 3.3x 3.0x 2.6x 0.9% 0.8% 1.0% 18.7% 16.1% 16. Metropolitan Bank & Trust Dec 5,025 81.95 106.00 29% Buy 8-5 -4-1 -9 3.5-6 10.0x 12.2x 11.2x 1.7x 1.5x 1.3x 1. 1.1% 1.2% 17.8% 12.9% 12.6% BDO Unibank Dec 7,675 95.95 106.00 10% Buy 40-1 7 10 21 4.0 4 15.2x 15.1x 13.9x 2.2x 2.0x 1.8x 2.2% 2.2% 1.6% 14.7% 13.7% 13. Philippine National Bank Dec 2,113 84.50 90.00 7% Hold 14-4 -7-1 -3 0.4 11 14.5x 14.5x 11.7x 1.1x 1.1x 1.0x 0.0% 0.0% 0.0% 8.6% 7.8% 9.2% Rizal Commercial Bank Dec 1,510 53.00 68.00 28% Buy 25-1 -4 10 17 0.5-3 8.5x 10.0x 9.0x 1.7x 1.5x 1.3x 3.7% 3.1% 3.3% 19.6% 19. 18.0% Security Banking Corp* Dec 1,918 142.40 NA NA NA 23 1 18 27 3 0.9 18 16.4x 13.3x 11.8x 2.0x 1.8x 1.6x 0.7% 1. 1.5% 12.9% 14.5% 14. Union Bank of Philippines* Dec 1,689 117.90 NA NA NA -6-3 0-3 -3 0.1-5 8.2x 10.0x 9.1x 1.6x 1.5x 1.4x 3.8% 3.2% 3.1% 19.6% 19.2% 18. China Banking Corp* Dec 2,054 56.05 NA NA NA -3 3-6 -5-10 0.3 5 15.4x 16.1x 13.9x 1.7x 1.5x 1.5x 1.8% 2.1% 2.3% 11.6% 9.8% 10.2% East West Banking Corp* Dec 779 29.95 NA NA NA 23-4 3 24 8 0.4 20 13.8x 12.1x 9.6x 1.5x 1.3x 1.1x 0.0% 0.0% 0.5% 11.2% 11.1% 12. Weighted average 4 14.4x 15.1x 13.4x 2.2x 2.0x 1.8x 1.6% 1.5% 1.5% 15.8% 14.0% 14.0% Simple average 6 13.4x 13.7x 11.9x 1.9x 1.7x 1.5x 1.6% 1.6% 1.6% 14.7% 13.6% 13.7% Weighted average (ex-bpi) 4 13.1x 13.6x 12.1x 1.8x 1.6x 1.5x 1.8% 1.8% 1.6% 14.8% 13.2% 13.2% Simple average (ex-bpi) 6 12.9x 13.0x 11.3x 1.7x 1.5x 1.4x 1.7% 1.7% 1.7% 14.3% 13.3% 13. Weighted Average (ASEAN) 9 13.8x 13.0x 11.6x 2.2x 2.0x 1.7x 2.6% 2.8% 2.9% 17.1% 16.0% 15.8% Simple Average (ASEAN) 8 12.4x 11.8x 10.4x 1.8x 1.6x 1.5x 2.8% 2.8% 2.9% 15.3% 14.3% 14.3% * Based on Bloomberg consensus Source: Companies, Bloomberg Finance L.P., AllianceDBS Page 8
STOCK PROFILES Page 9
Company Focus OCBC Bloomberg: OCBC SP Reuters: OCBC.SI Refer to important disclosures at the end of this report DBS Group Research. Equity 28 Oct 2014 BUYS$9.78 STI : 3,226.11 Price Target :12-month S$12.70 (Prev S$12.05) Reason for Report :Earnings and TP revision Potential Catalyst: Synergistic benefits from WHB s acquisition; sustianable deliverables in wealth management and insurance AllianceDBSvs Consensus: Above consensus estimates Analyst LIM Sue Lin+603 2604 3969 suelin@alliancedbs.com Price Relative 11.7 10.7 9.7 8.7 7.7 S$ 6.7 90 Oct-10 Oct-11 Oct-12 Oct-13 Oct-14 Forecasts and Valuation FY Dec (S$ m) 2013A 2014F 2015F 2016F Pre-prov. Profit 3,779 4,832 5,446 6,030 Net Profit 2,686 3,482 3,911 4,305 Net Pft (Pre Ex.) 2,686 3,482 3,910 4,304 EPS (S cts) 75.9 95.1 100.8 110.9 EPS Pre Ex. (S cts) 75.9 95.1 100.8 110.9 EPS Gth (%) (31) 25 6 10 EPS Gth Pre Ex (%) (1) 25 6 10 Diluted EPS (S cts) 75.9 89.7 100.8 110.9 PE Pre Ex. (X) 12.9 10.3 9.7 8.8 Net DPS (S cts) 32.8 36.3 40.6 45.2 Div Yield (%) 3.4 3.7 4.2 4.6 ROAE Pre Ex. (%) 11.5 12.5 11.8 12.1 ROAE (%) 11.5 12.5 11.8 12.1 ROA (%) 0.9 1.0 1.0 1.0 BV Per Share (S cts) 689 824 884 950 P/Book Value (x) 1.4 1.2 1.1 1.0 Earnings Rev (%): 19 24 26 Consensus EPS (S cts): 89.9 94.1 103.1 Other Broker Recs: B: 15 S: 3 H: 9 ICB Industry :Financials ICB Sector: Banks Principal Business:Financials OCBC (LHS) Relative STI INDEX (RHS) Relative Index Source of all data: Company, AllianceDBS, Bloomberg Finance L.P 210 190 170 150 130 110 Opportunities await Opportunities await with enlarged Greater China exposure post WHB Imputed WHB s financials but disregarding potential synergies for now Maintain BUY, TP lifted to S$12.70 after rolling over valuation base to FY15F Adding WHB into the equation. We are imputing 5 months of WHB s forecasts into our FY14F earnings in addition to nudging our stand-alone forecasts for OCBC; FY14F appears to be a swell year with ROE expected to reach 12.6%. However, the full impact of the rights issue would be felt in FY15-16F with its enlarged equity base. We expect ROE to gradually edge towards 12% by FY16F. Our forecast that includes WHB s financials does not include potential synergies from the merger as we merely added financials of the two entities. Exciting outlook. We believe the inclusion of WHB s operations into OCBC provides it an exciting outlook ahead. OCBC would now be able to build a deposit funding base in US$ and Rmb. More importantly, with Greater China presence, OCBC s growth prospects in wealth management, retail & commercial banking and insurance are further enhanced. We believe active crossselling for OCBC s private banking and insurance businesses will be key wins. Maintain BUY, TP lifted to S$12.70 on rolling over valuation base to FY15F.We raised our TP to S$12.70 TP after imputing WHB s financials for OCBC and raising stand-alone OCBC earnings for FY14F. We have also rolled over our valuation base to FY15F. Our TP is based on the Gordon Growth Model (12% ROE, 10.2% cost to equity and 6% growth) implying a 1.4x FY15F enlarged book value. Key catalysts would be the successful integration of WHB operations, which would further enhance OCBC s earnings profile and give rise to a more diversified geographical profit distribution. Key risk to our forecast and call would be OCBC s inability to integrate WHB s operations and extract synergies from the acquisition. At A Glance Issued Capital (m shrs) 3,930 Mkt. Cap (S$m/US$m) 38,431 / 30,133 Major Shareholders Selat Pte Ltd (%) 10.8 Free Float (%) 84.3 Avg. Daily Vol.( 000) 4,933 www.dbsvickers.com ed: JS / sa: JC
Company Focus OCBC Key Assumptions FY Dec 2012A 2013A 2014F 2015F 2016F Gross Loans Growth 6.6 17.7 25.6 9.4 8.7 Customer Deposits Growth 6.8 18.7 27.6 11.2 11.2 Yld. On Earnings Assets 2.8 2.6 2.7 2.7 2.7 Avg Cost Of Funds 1.1 1.0 1.0 1.1 1.1 Income Statement (S$ m) FY Dec 2012A 2013A 2014F 2015F 2016F Net Interest Income 3,748 3,883 4,998 5,791 6,365 Non-Interest Income 4,213 2,738 3,124 3,522 3,836 Operating Income 7,961 6,621 8,123 9,313 10,200 Operating Expenses (2,755) (2,842) (3,291) (3,867) (4,170) Pre-provision Profit 5,206 3,779 4,832 5,446 6,030 Provisions (271) (266) (300) (383) (472) Associates 27 54 67 76 84 Exceptionals 0 0 0 1 1 Pre-tax Profit 4,962 3,567 4,599 5,140 5,642 Taxation (699) (597) (782) (874) (959) Minority Interests (270) (202) (253) (273) (296) Preference Dividend (107) (82) (82) (82) (82) Net Profit 3,886 2,686 3,482 3,911 4,305 Net Profit bef Except 2,718 2,686 3,482 3,910 4,304 Growth (%) Net Interest Income Gth 9.9 3.6 28.7 15.9 9.9 Net Profit Gth 75.0 (30.9) 29.6 12.3 10.1 Margins, Costs & Efficiency (%) Spread 1.7 1.6 1.6 1.6 1.6 Net Interest Margin 1.8 1.6 1.7 1.7 1.7 Cost-to-Income Ratio 34.6 42.9 40.5 41.5 40.9 Business Mix (%) Net Int. Inc / Opg Inc. 47.1 58.6 61.5 62.2 62.4 Non-Int. Inc / Opginc. 52.9 41.4 38.5 37.8 37.6 Fee Inc / Opg Income 15.0 20.5 18.9 18.9 19.0 Oth Non-IntInc/OpgInc 37.9 20.9 19.6 18.9 18.6 Profitability (%) ROAE Pre Ex. 12.5 11.5 12.5 11.8 12.1 ROAE 17.8 11.5 12.5 11.8 12.1 ROA Pre Ex. 1.5 0.9 1.0 1.0 1.0 ROA 1.5 0.9 1.0 1.0 1.0 Source: Company, AllianceDBS Sensitivity Analysis 2015 Loan growth +/- 1% Net Profit +/- 0.7% NIM +/- 10bps Net Profit +/- 6.3% Driven by wealth management and insurance income Credit costs expected to remain low Margins Trend S$ m 6,000 5,000 4,000 3,000 2,000 1,000 0 2012A 2013A 2014F 2015F 2016F Net Interest Income 1.9% 1.9% 1.8% 1.8% 1.7% 1.7% 1.6% 1.6% Net Interest Income Margin Page 11
Company Focus OCBC Quarterly / Interim Income Statement (S$ m) FY Dec 2Q2013 3Q2013 4Q2013 1Q2014 2Q2014 Net Interest Income 961 978 1,031 1,087 1,126 Non-Interest Income 606 779 679 800 850 Operating Income 1,567 1,757 1,710 1,887 1,976 Operating Expenses (733) (696) (728) (720) (774) Pre-Provision Profit 834 1,061 982 1,167 1,202 Provisions (83) (94) (68) (41) (66) Associates 23 13 6 17 18 Exceptionals 0 0 0 0 0 Pretax Profit 774 980 920 1,143 1,154 Taxation (149) (154) (154) (185) (172) Minority Interests (28) (67) (51) (59) (61) Net Profit 597 759 715 899 921 Growth (%) Net Interest Income Gth 5.4 1.8 5.4 5.4 3.6 Net Profit Gth (14.2) 27.1 (5.8) 25.7 2.4 Quarterly Net Profit & Growth 1,200 1,000 800 600 400 200 0 1Q2012 2Q2012 3Q2012 Net Interest Income Lifted by trade-related and trading income; NIM trend sustained 4Q2012 1Q2013 2Q2013 3Q2013 4Q2013 1Q2014 2Q2014 Net Interest Income Growth % (QoQ) 7% 6% 5% 3% 2% 1% 0% -1% -2% -3% Balance Sheet (S$ m) FY Dec 2012A 2013A 2014F 2015F 2016F Gross Loan& Growth 250,000 S$ m 30% Cash/Bank Balance 16,397 19,341 22,636 25,235 28,147 Government Securities 22,298 20,610 23,055 25,361 27,897 Inter Bank Assets 29,811 39,573 40,269 42,152 43,241 Total Net Loans & Advs. 142,376 167,854 211,169 230,946 251,057 Investment 14,932 19,602 27,840 30,729 33,730 Associates 355 380 425 430 435 Fixed Assets 2,581 2,629 3,414 3,389 3,360 Goodwill 3,818 3,741 6,659 6,666 6,666 Other Assets 11,104 11,313 13,677 14,950 16,242 Life Ass Fund Inv Assets 52,271 53,405 53,405 53,405 53,405 Total Assets 295,943 338,448 402,548 433,263 464,179 Customer Deposits 165,139 195,974 249,975 277,858 308,979 Inter Bank Deposits 25,656 21,549 16,575 15,357 10,827 Debts/Borrowings 11,424 26,702 30,911 30,911 30,911 Others 12,636 12,961 15,317 16,761 18,240 Minorities 2,897 2,964 3,217 3,490 3,786 Shareholders' Funds 25,804 25,115 33,370 35,704 38,254 Life Ass Fund Liabs 52,387 53,183 53,183 53,183 53,183 Total Liab& S/H s Funds 295,943 338,448 402,548 433,263 464,179 Source: Company, AllianceDBS 200,000 150,000 100,000 50,000 0 2012A 2013A 2014F 2015F 2016F Gross Loan (LHS) Sustainable loan growth at low double digits Customer Deposit & Growth 300,000 250,000 200,000 150,000 100,000 50,000 0 S$ m Gross Loan Growth (%) (YoY) (RHS) 2012A 2013A 2014F 2015F 2016F 25% 20% 15% 10% 5% 0% 40% 35% 30% 25% 20% 15% 10% 5% 0% Customer Deposits (LHS) Customer Deposits Growth (%) (YoY) (RHS) Page 12
Company Focus OCBC Financial Stability Measures (%) FY Dec 2012A 2013A 2014F 2015F 2016F Balance Sheet Structure Loan-to-Deposit Ratio 87.2 86.5 85.2 83.9 82.0 Net Loans / Total Assets 48.1 49.6 52.5 53.3 54.1 Investment / Total Assets 5.0 5.8 6.9 7.1 7.3 Cust. Dep./Int. Bear. Liab. 81.7 80.2 84.0 85.7 88.1 Interbank Dep / Int. Bear. 12.7 8.8 5.6 4.7 3.1 Asset Quality NPL / Total Gross Loans 0.8 0.7 0.6 0.6 0.7 NPL / Total Assets 0.4 0.4 0.3 0.3 0.4 Loan Loss Reserve Coverage 144.5 140.5 141.0 140.9 127.8 Provision Charge-Off Rate 0.2 0.2 0.1 0.2 0.2 Capital Strength Total CAR 18.6 16.3 15.8 16.9 17.7 Tier-1 CAR 16.7 14.6 13.4 14.6 15.6 Source: Company, AllianceDBS Lowest NPL ratio among peers NPL / Total Gross Loans 0.9% 0.8% 0.7% 0.6% 0.5% 0. 0.3% 0.2% 0.1% 0.0% 2012A 2013A 2014F 2015F 2016F Target Price & Ratings History 10.39 9.89 9.39 S$ 1 2 3 4 5 6 7 S.No. Date Closing Ta rge t Price Price Rating 1: 01 Nov 13 10.07 11.96 Buy 2: 04 Dec 13 9.96 12.05 Buy 3: 21 Feb 14 9.38 12.05 Buy 4: 02 Apr 14 9.33 12.05 Buy 5: 02 May 14 9.45 12.05 Buy 6: 06 Aug 14 9.82 12.05 Buy 7: 19 Aug 14 10.02 12.05 Buy 8.89 8.39 Oct-13 Feb-14 Jun-14 Note : Share price and Target price are adjusted for corporate actions. Source: AllianceDBS Page 13
Company Focus UOB Bloomberg: UOB SP Reuters: UOBH.SI Refer to important disclosures at the end of this report DBS Group Research. Equity 28 Oct 2014 HOLD S$21.78 STI : 3,226.11 Price Target :12-month S$23.10 (Prev S$22.50) Reason for Report :TP revision Potential Catalyst: Ability to overcome funding cost pressures; enhancing its regional operations AllianceDBS vs Consensus:Slightly above consensus estimates Analyst LIM Sue Lin+603 2604 3969 suelin@alliancedbs.com Price Relative 25.3 23.3 21.3 19.3 17.3 15.3 S$ 13.3 86 Oct-10 Oct-11 Oct-12 Oct-13 Oct-14 Forecasts and Valuation FY Dec (S$ m) 2013A 2014F 2015F 2016F Pre-prov. Profit 3,822 4,211 4,612 5,056 Net Profit 2,898 2,978 3,235 3,556 Net Pft (Pre Ex.) 2,898 2,978 3,235 3,556 EPS (S cts) 184.0 189.1 205.4 225.8 EPS Pre Ex. (S cts) 184.0 189.1 205.4 225.8 EPS Gth (%) 8 3 9 10 EPS Gth Pre Ex (%) 8 3 9 10 Diluted EPS (S cts) 182.2 187.2 203.4 223.6 PE Pre Ex. (X) 11.8 11.5 10.6 9.6 Net DPS (S cts) 75.0 77.1 78.1 85.8 Div Yield (%) 3.4 3.5 3.6 3.9 ROAE Pre Ex. (%) 12.3 11.9 12.0 12.2 ROAE (%) 12.3 11.9 12.0 12.2 ROA (%) 1.1 1.1 1.1 1.1 BV Per Share (S cts) 1,539 1,648 1,775 1,915 P/Book Value (x) 1.4 1.3 1.2 1.1 Earnings Rev (%): - - - Consensus EPS (S cts): 190.0 202.3 223.0 Other Broker Recs: B: 8 S: 3 H: 17 ICB Industry :Financials ICB Sector: Banks Principal Business:Financials UOB (LHS) Relative STI INDEX (RHS) Relative Index Source of all data: Company, AllianceDBS, Bloomberg Finance L.P. 206 186 166 146 126 106 Funding before lending Funding and liquidity remain key focus areas NIM to remain sluggish while keeping NPLs under the radar in the near term Maintain HOLD, TP raised to S$23.10 after rolling over valuation base to FY15F Focus on funding and liquidity. It has always been UOB s stance to fund its operations locally before lending. UOB will focus on raising stable funding sources and selectively remaining competitive in the retail side. Meanwhile, funding cost pressure may remain a feature for UOB s regional operations for the rest of the year. NIM would at best remain flat but there could be downside blips, and if so, funding would likely be the culprit. UOB has diversified its funding sources, skewing a little more towards wholesale funding with duration of up to 1 year. UOB increased its US$ Commercial Paper issuance beyond US$12bn. Near-term NPL issues to contend with. There were blips in its mortgage NPLs in 2Q14. This arose from a single development project with cash flow issues. While NPL ratios may be a little dented, provisions are not expected to rise. UOB has always been conservative in setting aside provisions. UOB remains the bank with the highest general provision reserve ratio at 1.. Maintain HOLD, TP raised to S$23.10 as we roll over valuation base to FY15F. We lift our TP to S$23.10 after rolling over the valuation base to FY15F. Our TP is based on the Gordon Growth Model (12% ROE, 10.2% cost of equity and 5% growth), implying 1.3x FY15F book value. While UOB s regional footprint in ASEAN is more complete vs peers, near term headwinds particularly in managing its funding cost could hamper growth. UOB s less-entrenched non-interest income franchise coupled with its smaller exposure to Greater China could also limit its growth prospects going forward. Its Malaysian business would be its key driver for its regional operations in the near term. At A Glance Issued Capital (m shrs) 1,601 Mkt. Cap (S$m/US$m) 34,878 / 27,346 Major Shareholders Wee Investment (%) 7.6 Free Float (%) 87.2 Avg. Daily Vol.( 000) 1,719 www.dbsvickers.com ed: JS / sa: JC
Company Focus UOB Key Assumptions FY Dec 2012A 2013A 2014F 2015F 2016F Gross Loans Growth 8.3 16.8 9.3 8.9 8.9 Customer Deposits Growth 7.4 11.0 9.0 9.0 9.0 Yld. On Earnings Assets 3.0 2.7 2.7 2.8 2.8 Avg Cost Of Funds 1.1 1.0 1.1 1.1 1.1 Income Statement (S$ m) FY Dec 2012A 2013A 2014F 2015F 2016F Net Interest Income 3,917 4,120 4,536 4,966 5,439 Non-Interest Income 2,578 2,600 2,809 3,038 3,286 Operating Income 6,495 6,720 7,346 8,004 8,726 Operating Expenses (2,755) (2,898) (3,135) (3,392) (3,670) Pre-provision Profit 3,741 3,822 4,211 4,612 5,056 Provisions (477) (429) (557) (648) (705) Associates 87 191 89 91 93 Exceptionals 0 0 0 0 0 Pre-tax Profit 3,351 3,584 3,743 4,055 4,443 Taxation (531) (559) (636) (689) (755) Minority Interests (17) (17) (19) (20) (22) Preference Dividend (110) (110) (110) (110) (110) Net Profit 2,693 2,898 2,978 3,235 3,556 Net Profit bef Except 2,693 2,898 2,978 3,235 3,556 Growth (%) Net Interest Income Gth 6.5 5.2 10.1 9.5 9.5 Net Profit Gth 21.5 7.6 2.8 8.6 9.9 Margins, Costs & Efficiency (%) Spread 1.8 1.7 1.7 1.7 1.7 Net Interest Margin 1.9 1.7 1.7 1.7 1.8 Cost-to-Income Ratio 42.4 43.1 42.7 42.4 42.1 Business Mix (%) Net Int. Inc / Opg Inc. 60.3 61.3 61.8 62.0 62.3 Non-Int. Inc / Opginc. 39.7 38.7 38.2 38.0 37.7 Fee Inc / Opg Income 23.2 25.7 25.5 25.4 25.3 Oth Non-IntInc/OpgInc 16.5 12.9 12.7 12.5 12.3 Profitability (%) ROAE Pre Ex. 12.3 12.3 11.9 12.0 12.2 ROAE 12.3 12.3 11.9 12.0 12.2 ROA Pre Ex. 1.2 1.1 1.1 1.1 1.1 ROA 1.2 1.1 1.1 1.1 1.1 Source: Company, AllianceDBS Sensitivity Analysis 2015 Loan growth +/-1% Net Profit +/- 5.9% NIM +/- 10bps Net Profit +/- 0.6% Still very much loanrelated driven Normalised credit cost of 30bps Margins Trend S$ m 5,000 4,000 3,000 2,000 1,000 0 2012A 2013A 2014F 2015F 2016F Net Interest Income 2.0% 2.0% 1.9% 1.9% 1.8% 1.8% 1.7% 1.7% 1.6% Net Interest Income Margin Page 15
Company Focus UOB Quarterly / Interim Income Statement (S$ m) FY Dec 2Q2013 3Q2013 4Q2013 1Q2014 2Q2014 Net Interest Income 1,015 1,046 1,095 1,110 1,124 Non-Interest Income 628 618 647 642 760 Operating Income 1,643 1,664 1,742 1,752 1,884 Operating Expenses (726) (715) (762) (755) (787) Pre-Provision Profit 917 949 980 997 1,097 Provisions (75) (85) (139) (157) (150) Associates 101 52 14 42 26 Exceptionals 0 0 0 0 0 Pretax Profit 944 916 855 882 974 Taxation (156) (182) (78) (89) (161) Minority Interests (4) (4) (4) (5) (5) Net Profit 783 730 773 788 808 Growth (%) Net Interest Income Gth 5.3 3.1 4.7 1.4 1.3 Net Profit Gth 8.5 (6.8) 5.9 1.9 2.5 Quarterly Net Profit & Growth 1,150 1,100 1,050 1,000 950 900 850 1Q2012 2Q2012 3Q2012 Net Interest Income 4Q2012 1Q2013 2Q2013 3Q2013 4Q2013 1Q2014 2Q2014 Net Interest Income Growth % (QoQ) Lifted by one-off investment gain from disposal of UOL shares. Fee income was weaker on softer transactions 6% 5% 3% 2% 1% 0% -1% -2% -3% Balance Sheet (S$ m) FY Dec 2012A 2013A 2014F 2015F 2016F Cash/Bank Balance 33,056 26,881 26,422 28,800 31,392 Government Securities 22,680 17,598 18,478 19,402 20,372 Inter Bank Assets 15,991 31,412 29,274 31,833 34,625 Total Net Loans & Advs. 152,930 178,857 195,162 212,223 230,832 Investment 11,389 12,768 14,321 15,548 16,885 Associates 1,102 997 997 996 996 Fixed Assets 2,250 2,293 2,174 2,048 2,048 Goodwill 4,168 4,144 4,144 4,144 4,144 Other Assets 9,334 9,279 15,613 16,978 18,467 Total Assets 252,900 284,229 306,586 331,973 359,762 Gross Loan& Growth 200,000 150,000 100,000 50,000 0 S$ m 2012A 2013A 2014F 2015F 2016F Gross Loan (LHS) Gross Loan Growth (%) (YoY) (RHS) 20% 18% 16% 1 12% 10% 8% 6% 2% 0% Customer Deposits 182,029 202,006 220,187 240,003 261,604 Inter Bank Deposits 21,538 26,247 21,658 23,769 26,160 Debts/Borrowings 12,800 18,981 18,981 18,981 18,981 Others 11,261 10,418 17,459 18,892 20,464 Minorities 192 189 208 228 250 Shareholders' Funds 25,080 26,388 28,093 30,099 32,304 Total Liab& S/H s Funds 252,900 284,229 306,586 331,973 359,762 Source: Company, AllianceDBS Loan growth forecast at 9-10% Customer Deposit & Growth 250,000 200,000 150,000 100,000 50,000 0 S$ m 2012A 2013A 2014F 2015F 2016F Customer Deposits (LHS) Customer Deposits Growth (%) (YoY) (RHS) 20% 18% 16% 1 12% 10% 8% 6% 2% 0% Page 16
Company Focus UOB Financial Stability Measures (%) FY Dec 2012A 2013A 2014F 2015F 2016F Balance Sheet Structure Loan-to-Deposit Ratio 85.6 90.1 90.3 90.2 90.1 Net Loans / Total Assets 60.5 62.9 63.7 63.9 64.2 Investment / Total Assets 4.5 4.5 4.7 4.7 4.7 Cust. Dep./Int. Bear. Liab. 84.1 81.7 84.4 84.9 85.3 Interbank Dep / Int. Bear. 10.0 10.6 8.3 8.4 8.5 Asset Quality NPL / Total Gross Loans 1.4 1.1 1.1 1.1 1.1 NPL / Total Assets 0.9 0.7 0.7 0.7 0.7 Loan Loss Reserve Coverage 133.7 155.9 167.2 179.8 191.4 Provision Charge-Off Rate 0.3 0.2 0.3 0.3 0.3 Capital Strength Total CAR 19.1 16.6 16.9 17.1 17.4 Tier-1 CAR 14.7 13.2 13.5 13.8 14.1 Source: Company, AllianceDBS Highest loan-to-deposit ratio among peers NPL / Total Gross Loans 1. 1.2% 1.0% 0.8% 0.6% 0. 0.2% 0.0% 2012A 2013A 2014F 2015F 2016F Target Price & Ratings History 24.49 23.49 22.49 21.49 S$ 2 4 5 S.No. Date Closing Ta rge t Price Price Rating 1: 06 Nov 13 20.96 21.90 Hold 2: 04 Dec 13 20.85 21.90 Hold 3: 21 Feb 14 20.90 22.50 Buy 4: 02 May 14 21.50 22.50 Hold 5: 01 Aug 14 23.18 22.50 Hold 20.49 19.49 1 3 18.49 Oct-13 Feb-14 Jun-14 Note : Share price and Target price are adjusted for corporate actions. Source: AllianceDBS Page 17
DBSV recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame) Share price appreciation + dividends GENERAL DISCLOSURE/DISCLAIMER This report is prepared by AllianceDBS Research Sdn Bhd ( ADBSR ) (formerly known as HwangDBS Vickers Research Sdn Bhd), a subsidiary of Alliance Investment Bank Berhad ( AIBB ) and an associate of DBS Vickers Securities Holdings Pte Ltd ( DBSVH ). This report is solely intended for the clients of DBS Bank Ltd and DBS Vickers Securities () Pte Ltd, its respective connected and associated corporations and affiliates (collectively, the DBS Vickers Group ) only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of ADBSR. The research set out in this report is based on information obtained from sources believed to be reliable and ADBSR, its holding company AIBB, their respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively, the Alliance Bank Group ) do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to change without notice. This document is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial advice. The Alliance Bank Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The Alliance Bank Group, along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. The Alliance Bank Group may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking/corporate advisory and other banking services for these companies. They may also have received compensation and/or seek to obtain compensation for broking, investment banking/corporate advisory and other services from the subject companies. Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments. The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed and it may not contain all material information concerning the company (or companies) referred to in this report. The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED UPON as a representation and/or warranty by the Alliance Bank Group (and/or any persons associated with the aforesaid entities), that: (a) (b) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments stated therein. Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies) mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the commodity referred to in this report. DBS Vickers Securities (USA) Inc ("DBSVUSA")"), a U.S.-registered broker-dealer, does not have its own investment banking or research department, nor has it participated in any investment banking transaction as a manager or co-manager in the past twelve months. ANALYST CERTIFICATION The research analyst primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst also certifies that no part of his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report. As of the date the report is published, the analyst and his/her spouse and/or relatives who are financially dependent on the analyst, do not hold interests in the securities recommended in this report ( interest includes direct or indirect ownership of securities). COMPANY-SPECIFIC / REGULATORY DISCLOSURES 1. DBS Bank Ltd., DBS Vickers Securities () Pte Ltd ( DBSVS ), their subsidiaries and/or other affiliates do not have a proprietary position in the securities recommended in this report as of 24 Oct 2014, except OCBC, UOB, Bank Negara Indonesia Bank Rakyat Indo, Bank Tabungan Negara, Bank Panin, Bank of Ayudhya, KASIKORNBANK, Siam Commercial Bank, Thanachart Capital, Tisco Financial Group, TMB Bank, BFI Finance 2. DBS Bank Ltd., DBSVS, DBSVUSA, their subsidiaries and/or other affiliates beneficially own a total of 1% of any class of common equity securities of the TMB as of 28 Oct 2014. Page 10