RHB Bank Singapore has maintained its “neutral” call on Singapore banks, as impending interest rate cuts take the spotlight off the 2QFY2024 results. Analysts have named DBS Bank as their top pick for the sector.
Singapore banks’ results were a slight beat on milder-than-expected q-o-q decline in trading and investment (T&I) income while opex and credit cost tracked below estimates, says RHB analysts.
A recap of Singapore banks’ results are as follows: sector operating income eased 1% q-o-q (+5% y-o-y) mainly due to lower non-interest income (NII) on the back of T&I income moderating from the 1QFY2024 high base.
“Otherwise, NII was broadly stable q-o-q (+2% y-o-y) with asset growth partly offset by slight net interest margin (NIM) compression, while fee income stayed healthy,” they add. “Meanwhile, sector opex rose 2% q-o-q (+4% y-o-y) but was broadly under control.”
Therefore, even though cost income ratio (CIR) ticked higher to 40.5% from 39.4% in 1QFY2024, the ratio was stable y-o-y.
Meanwhile, sector loans credit cost was stable q-o-q at 18 basis points while gross impaired loan (GIL) improved to 1.17% from 1.2% at end-1QFY2024.
“Despite positive earnings surprise, except for DBS, guidance and targets were retained,” say the analysts.
Singapore banks have been focused on protecting NII ahead of the rates downcycle by adding duration and fixed rate assets to their portfolios, they add.
“NII sensitivity for the banks currently stands at $4 million - $5 million per basis point (bps) change, or about 3% (DBS) to 7% (UOB) impact to profit before tax for 100 bps change in rates. Other mitigating factors include potentially improved volumes and wealth management opportunities, as well as lower credit cost,” they note.
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On the non-II front, banks continue to enjoy steady net new money inflows and July’s momentum has been positive. On asset quality, the tone was the same – apart from a few isolated incidents, the banks have not noticed anything systemic.
The analysts raise their FY2024 patmi forecasts for DBS by about 3%, while their FY2024-FY2026 patmi for OCBC is upgraded by 2%-4%. All in, their FY2024-FY2026 patmi is revised up by 1%-2% per annum.
“We now expect sector 2024 patmi to rise by 6% y-o-y, albeit still a moderation from 2023’s +25% y-o-y. The moderation in growth is mainly due to a more modest +5% y-o-y operating income growth projection on a 3bps NIM squeeze and slower non-II growth,” they end.
