DBS Bank Banks, the Positive Impact on NIM Is Likely to Roll in from 2H17

Singapore Market Focus Singapore Strategy Refer to important disclosures at the end of this report DBS Group Research . Equity 17 Mar 2017 STI : 3,163.52 Banking in on Fed rate hikes The Fed forecasts three rate hikes in 2017 and 2018, Analyst Analyst Janice CHUA +65 6682 3692 Yeo Kee Yan CMT +65 6682 3706 reassures on accommodative policy [email protected] [email protected] Favouring stocks with yield and net cash - Genting Derek TAN +65 6682 3716 Sue Lin LIM +65 8332 6843 Singapore, SGX, ComfortDelgro, Sheng Siong, [email protected] [email protected] China Aviation Oil, Singapore O&G, Sunningdale, Fu Key Indices Yu and OKP Current % Chng Expect banks to enjoy visible NIM uptick in 2H – STI Index 3,137.43 -0.2% pick UOB FS Small Cap Index 391.80 -0.4% USD/SGD Curncy 1.41 0.6% Buy property stocks on pullback - Frasers Daily Volume (m) 2,260 Centrepoint Limited and UOL Daily Turnover (S$m) 1,176 Daily Turnover (US$m) 834 Stay selective on S-REITs - Ascendas REIT, Croesus Source: Bloomberg Finance L.P. Retail Trust, Frasers Logistics & Industrial Trust, Keppel DC REIT and Mapletree Commercial Trust Market Key Data Fed’s hike in the price, reassures on accommodative policy. The (%) EPS Gth Div Yield Federal Reserve raised the Fed funds rate by 25bps to 1% last 2016 (5.0) 3.7 night and sounded off another two more this year, in line with 2017F 15.0 3.7 consensus expectations. Financial markets reacted with the yield 2018F 7.4 3.9 on 10-year US Treasury notes falling 9bps to 2.51%. The US Dollar Index fell 0.25% to 101 on the back of a “dovish” outlook (x) PER EV/EBITDA from the Fed. 2016 17.4 14.0 2017F 15.1 12.6 Rising interest rates favour banks. This re affirms the catalyst for 2018F 14.1 11.7 Source: DBS Bank banks, the positive impact on NIM is likely to roll in from 2H17. This could lead to a re-pricing of 50% of the banks’ overall loan book. Sensitivity analysis points to an increase in net profit by STOCKS c.2% for UOB and OCBC for every 25-bp hike in SIBOR/SOR, HK$ Price Mkt Cap 12mth Performance (%) S$ US$m Target S$ 3 mth 12 mth Rating and US$ loan rates collectively. Our pick is UOB, which has turned more optimistic on asset quality outlook and has a larger Genting Singapore 0.99 8,496 1.20 0.5 20.7 BUY provision reserves buffer. Singapore Exchange 7.54 5,759 8.30 1.8 (2.3) BUY ComfortDelgro 2.53 3,895 2.94 (1.9) (14.8) BUY Stocks with yield backed by net cash Stocks that offer both yield Sheng Siong Group 0.935 1,003 1.13 (2.6) 9.4 BUY China Aviation Oil 1.46 901 1.85 2.8 89.6 BUY and growth should benefit from the current rising interest rate Singapore O&G Ltd 1.24 211 1.60 7.4 59.0 BUY environment, and on the expectation of improving growth and Sunningdale Tech 1.57 211 1.64* 44.7 59.4 NR rising inflation. Our picks are Genting Singapore, SGX and Fu Yu Corp Ltd 0.22 118 0.25* 17.0 15.8 NR ComfortDelgro for large caps and Sheng Siong, China Aviation OKP Holdings 0.415 91.3 0.45* 43.1 53.7 NR Oil, Singapore O&G, Sunningdale, Fu Yu and OKP for small caps. UOB 21.51 25,117 22.70 1.5 14.5 BUY Frasers Centrepoint 1.720 3,545 2.00 11.7 7.8 BUY Among these, Genting Singapore and Singapore O&G further Ltd offer double-digit EPS growth for both FY17F and FY18F. UOL Group 6.830 3,898 7.64 8.9 15.8 BUY Positive on property developers, selective on REITS The impact of rising mortgage rates will be mitigated by hopes that the Source: DBS Bank, Bloomberg Finance L.P. Singapore government has started a gradual process to unwind * Potential Target Closing price as of 15 Mar 2017 property measures. Our property team advocates a buy-on- pullback stance as they see further sector upside. Top picks are FCL and UOL. S-REITs should be supported in the near term as the earlier concern about a more hawkish Fed eases. However, we remain selective on REITS. ed: TH / sa: YM, PY Market Focus FED’s 25 bp hike in the price makers pencilled in two more quarter-point rate increases The Federal Reserve raised the Fed funds rate by 25bps to 1% this year and three in 2018, unchanged from their last night and sounded off another two more this year, in projections in December 2016. line with consensus expectations. More importantly, Yellen calmed concerns among investors that the pace of rate hike Financial markets reacted with the yield on 10-year US will be gradual. Treasury notes falling 9bps to 2.51%. The US Dollar Index fell 0.25% to 101 on the back of a “dovish” outlook from Yellen said the central bank was willing to tolerate inflation the Fed. going above its 2% goal temporarily and that it intended to keep its policy accommodative for ‘some time’. Fed policy Fed’s dot plot remains unchanged from December 2017 forecast for three rate hikes in 2017 Source: US Federal Reserve, Bloomberg Finance L.P. Page 2 Market Focus Favouring Yield with Net Cash Our picks are Genting Singapore, SGX, and ComfortDelgro for large caps and Sheng Siong, China Aviation Oil, Stocks that offer both yield and net cash should be Singapore O&G, Sunningdale, Fu Yu and OKP for small underpinned in the current environment whereby interest caps. Among these, Genting Singapore and Singapore O&G rates are rising at a ‘gradual controlled’ pace on the further offer double-digit EPS growth for both FY17F and expectation of improving growth and rising inflation. We FY18F. screen through the stocks under our coverage that are in a net cash position and with at least 3% yield. Stocks with yield and net cash 12mth Mkt EPS EPS Div Div Net Debt / Price Target Target Cap PER 17 PER 18 Growth Growth Yield 16 Yield 17 Equity 17 P/BV 16 Company 15 Mar 17 Price Return (S$m) Rcmd (x) (x) 17 (%) 18 (%) (%) (%) (%) (x) Large Cap Genting 0.990 1.20 21% 11,905 BUY 31.0 21.6 49.9 43.1 3.0 3.0 cash 1.6 SGX 7.540 8.30 10% 8,070 BUY 22.5 20.2 1.5 11.3 3.9 4.0 cash 8.2 ComfortDelgro 2.530 2.94 16% 5,458 BUY 16.4 15.8 5.2 3.3 4.1 4.4 cash 2.2 Small-Mid Cap Sheng Siong 0.935 1.13 21% 1,406 BUY 20.7 19.5 8.2 6.2 4.0 4.3 cash 5.6 China Aviation 1.460 1.85 27% 1,263 BUY 10.3 9.6 -2.5 7.0 4.3 2.9 cash 1.4 Oil Singapore O&G 1.240 1.60 29% 296 BUY 28.3 22.9 18.6 23.6 2.5 3.0 cash 7.1 Sunningdale 1.570 1.64* 5% 295 9.6 8.3 -21.5 15.7 3.8 4.5 0.8 NR cash Tech OKP 0.415 0.45* 9% 128 NR 9.9 9.3 -9.7 6.2 4.8 4.0 cash 1.1 Fu Yu 0.220 0.25* 13% 166 NR 13.3 11.7 18 13.9 6.8 6.8 cash 1.0 Source: DBS Bank * Potential Target Implication for banks – Expect visible NIM uptick in 2H asset quality outlook and has a larger provision reserves buffer. The opposite seems to be the case for OCBC where Rising interest rates are positive for banks. Our bank analyst the worst of NPLs may not be over. Positively, both banks expects a visible uptick to NIM in the second half of this year are expected to grow loans at mid-single digits. Stronger that will see a re-pricing of 50% of the banks’ overall loan than expected multiplier GDP effect trickling in to better book. Sensitivity analysis points to an increase in net profit loan growth should provide upside surprise. Every additional by c.2% for UOB and OCBC for every 25-bp hike in 1ppt in loan growth would add to 0.7-0.8% to earnings. SIBOR/SOR, HK$ and US$ loan rates collectively. We currently have a BUY on UOB (TP S$22.70) and a HOLD on OCBC (TP S$10.30). UOB has turned more optimistic on Singapore: 3-month SIBOR, SOR, LIBOR (since end-2008) Singapore Banks: NIM Trends 2 NIM (Banks) NIM (Average/Industry) 0.024 0.024 1.5 0.022 0.02 0.02 1 0.016 0.018 0.5 0.012 0.016 0.008 0 0.014 0.012 0.004 Jun-16 Jun-15 Jun-14 Jun-13 Jun-12 Jun-11 Jun-10 Jun-09 Sep-16 Sep-15 Sep-14 Sep-13 Sep-12 Sep-11 Sep-10 Sep-09 Dec-16 Dec-15 Dec-14 Dec-13 Dec-12 Dec-11 Dec-10 Dec-09 Dec-08 Mar-16 Mar-15 Mar-14 Mar-13 Mar-12 Mar-11 Mar-10 -0.5 Mar-09 0.01 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017F -1 DBS OCBC UOB Average 3m SIBOR 3M SIBOR 3M SOR 3M LIBOR Source: Bloomberg Finance L.P., DBS Bank Source: Company, DBS Bank Page 3 Market Focus Implication for S-REITs – Stay selective are affected by heightened competition from the online space given the imminent launch of Amazon in Singapore.

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