Analysts from RHB Bank Singapore and PhillipCapital are mixed on all three Singapore banks, following the 2QFY2023 ended June earnings season. Analyst Glenn Thum from PhillipCapital has maintained his “overweight” rating, while RHB analysts have remained “neutral”, citing United Overseas Bank (UOB) as their sole buy with a target price of $31.70.
Thum says that he remains positive on banks, citing attractive dividend yields with upside surprises due to excess capital ratios and a push towards higher return on equity (ROE) as his key reason.
The analyst notes that the three month (3M)-Singapore Overnight Rate Average (SORA) growth was flattish, up 5 basis points (bps) m-o-m to 3.69%, where July’s recorded the smallest y-o-y growth in eight months of 265bps. However, July’s 3M-SORA is 7 bps higher than the 2Q2023 3M-SORA average of 3.62%.
Conversely, Hong Kong interest rates continued to surge and reversed the decline from 1Q2023. The 3M-Hong Kong Interbank Offer Rate (HIBOR) was up 26 bps m-o-m to 5.10%, the highest since Dec 2022’s 3M-HIBOR of 5.29%. July’s 3M-HIBOR improved by 324 bps y-o-y and was 82bps higher than 2Q2023 3M-HIBOR average of 4.28%.
Thum says that bank earnings for the 2QFY2023 were slightly above expectations, with patmi rising 35%, supported by net interest income (NII) growth of 37% y-o-y.
The guidance for FY2023 net interest margins (NIM) maintained at a low to mid-single digit, from 2.05%-2.20% to 2.10%-2.20%. Similarly, loan growth maintained at low to mid-single digit, while interim dividend jumped 39% y-o-y in 1HFY2023.
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Thum notes however, that Singapore loans growth declined in June by 5.02% y-o-y, below his estimates.
“This was below our estimate of low to mid-single digit growth for 2023 as the rise in interest rates started to be fully felt by consumers, nonetheless, it was stable m-o-m, the second in 10 months,” he adds.
Likewise, business and consumer loans fell by 6.92% and 1.85% y-o-y in June, but housing loans, which make up about 70% of consumer lending, grew 1.18% y-o-y in June to $223 billion for the month.
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The current and savings account (CASA) ratio grew to 18.9% (May 2023: 18.8%), the first m-o-m growth in 16 months.
Finally, Thum notes that Singapore Exchange’s (SGX) preliminary securities daily average value (SDAV) rose 13% y-o-y in July to $1.014 billion, the largest y-o-y increase since Feb 2022 as market sentiment started to improve.
The volatility index averaged 13.9 in July, down slightly from 14.0 in the previous month, and the derivatives daily average volume (DDAV) fell 6% y-o-y to 1.03 million in June, but up 5% m-o-m from 0.98 million in June.
The analyst sees the exchange as another beneficiary of the higher interest rate environment.
Meanwhile, analysts at RHB are less upbeat on the prospects of Singapore’s banks, noting that the 2QFY2023 results were “a slight beat”, mainly on a stronger-than-expected performance by DBS Group Holdings.
They note that the sector’s overall net profit during the 2QFY2023 was down 3% q-o-q mainly on a 56% q-o-q rise in loan allowances – pre-emptive provisions were booked in by Oversea-Chinese Banking Corporation (OCBC) and UOB.
All three banks had also declared interim dividends, with an absolute dividend per share (DPS) for 1HFY2023 of 25% - 43% y-o-y. They note that DBS also shared that it can return a further $1.20/share to shareholders in the coming years as part of its capital management plan.
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“We believe investors will view DBS’ clear pathway in a positive light, and wait for its peers to provide further clarity on their respective plans. Singapore banks currently offer more than 6% dividend yield, which will help support total shareholders’ returns,” they add.
The analysts note that new money inflows have stayed healthy, which helped with liquidity. Hence despite a muted loan growth, deposit repricing pressures appear contained while CASA outflow has slowed.
Meanwhile, the improvement in market sentiment in July could lead to stronger wealth management fees in the 2HFY2023, if sustained, the analysts say. As for asset quality, despite the pre-emptive provisions, banks shared that their portfolios look healthy with no visible stresses.
“That said, UOB thinks a longer interest rate environment may necessitate a higher level of cost of credit (CoC). OCBC revealed more details on the $3 billion incremental cumulative revenue that it expects to generate over the next three years from its refreshed strategy. Wealth and trade will be the key drivers, but OCBC guided for revenue to be back-loaded.” they add.
However, the RHB analysts question if the present earnings momentum will continue to pick up in 2HFY2023, as they believe that the tailwinds that Singapore banks have been enjoying are waning.
They cite the US policy rate hike cycle being at its tail-end, and anticipate that NIMs will soon peak and roll over, which could accelerate in 2HFY2024.
“Furthermore, the recent weak macroeconomic data releases from China suggest a loss in momentum in the post-Covid-19 economic rebound,” they say. Although UOB has lagged behind its peers year-to-date, the analysts think that the gap should narrow ahead especially if China’s macroeconomic data releases continue to stay soft.
“Among Singapore banks, UOB has the smallest exposure to Greater China at 15% of loans and 10% of pre-tax profit,” they say. “This is as compared to DBS’ about 30% of loans and 22.5% in pre-tax profits and OCBC’s 25% of loans and 19.5% of profits.”
For this reason, RHB analysts have cited UOB as their sole “buy”, noting that its valuation appears undemanding at 0.96x FY2024 P/BV vs 12.6% ROE.
As at 4.41pm, shares in DBS, OCBC and UOB are trading at $32.62, $12.26 and $27.91 respectively.
