And the prospect of higher provisions for non-performing loans (NPLs) from the O&M sector is looming large.
In 2Q, the banks reported a quarter-on-quarter uptick in non-performing assets (NPA), reversing from signs of stabilisation in the previous two quarters.
“UOB remains our preferred pick given that it offers potential dividend upside and earnings assurance should there be further asset quality weakness in the O&M space,” says lead analyst Danny Goh in a research report on Tuesday.
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Credit Suisse has an “outperform” call on UOB, with a target price of $25.60.
On top of having the smallest exposure to the O&M segment, UOB also has the highest coverage ratio amongst the Singapore banks. As at 2Q17, UOB has a coverage ratio of 113% compared to DBS’ 100%.
“Another key indicator of balance sheet capacity to absorb losses is the amount of reserves built through the cycle,” says Goh. “UOB has the highest total provisions and general provisions on balance sheet as a percentage of loans.”
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On the other hand, Goh points out that DBS has the highest absolute loan exposure to the O&M sector at $6 billion, accounting for some 2.0% of total loans. This is compared to UOB’s $3.7 billion, or 1.6% of loans.
According to Goh, DBS has some $2.2 billion worth of O&M loans that could turn non-performing, translating to approximately 38% of total O&M loans.
Credit Suisse has a “neutral” rating on DBS, with a target price of $22.05.
“In a 'worst case' scenario, we estimate potential 12% downside to our FY17 net profit estimate for DBS, while UOB's profits can remain intact,” says Goh.
On a fully diluted earnings per share basis, Credit Suisse estimates FY2017F P/E for UOB and DBS to be at 10.9x and 11.6x, respectively.
Both UOB and DBS are forecast to see a dividend yield of 3.2% in FY2017F.
As at 4.20pm, shares in UOB are trading 6 cents lower at $23.64 while shares in DBS are trading 14 cents lower at $20.51.
