Amid expectations of an impending interest rate cut, analysts from CLSA and RHB Bank Singapore are keeping their respective “overweight” and “neutral” calls on Singapore banks.
CSLA analysts Neel Sinha and Daxin Lin name their preference for the banks in the order of DBS Group Holdings (DBS), United Overseas Bank U11 (UOB) and Oversea-Chinese Banking Corporation (OCBC), while RHB’s analysts name DBS as its preferred pick for capital management.
“The SG banks had another strong quarter — DBS and OCBC beating Street expectations and UOB in line,” say CLSA analysts Neel Sinha and Daxin Lin.
In their Aug 23 note, the CLSA analysts note that the banks’ NIMs are broadly in-line for the quarter. DBS’s NIM remained flattish q-o-q while UOB’s was up marginally.
On the other hand, OCBC’s NIM fell below expectations, dropping 7 basis points (bps) following a stronger prior quarter.
The CLSA analysts say: “Loan growth is still anaemic with Greater China demand soft and trade loans weak but still looks to be tracking towards a low-single-digit growth for the year.”
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That said, the analysts view fee income as the “standout” for the quarter, with DBS and OCBC up by 17% and 12% respectively, while UOB experienced a slight decline.
They note that management for all three banks have indicated net new money inflows of a few billion every quarter.
In view of impending rate cuts, CSLA analysts say the bank’s have been preparing for the scenario and managing liability costs by building up the book on “high-quality” government securities and T-bill deposits.
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They highlight the efforts of DBS and UOB, noting that both banks have managed to lock in “attractive” rates for considerably long durations of over two years.
While this comes at the expense of a few bps of NIM, the analysts view it as a “good strategy”.
They add: “Hence, the sensitivity of NIMs to falling rates is expected to be lower. DBS, in particular, indicates that every -1bps change in rates affects net interest income (NII) by approximately $4 million by its estimate whereas in the past the impact would have been in the range of approximately $18 million.”
The analysts also note that commercial real estate (CRE) remains a “focal point” following the weakness in China and US markets.
They add that management does not see this as cause for concern, due to concentrated exposure with large Hong Kong developers.
“OCBC, in particular, indicated that it had stopped CRE lending in the US some years ago,” say the analysts.
Overall, Sinha and Lin remain positive towards Singapore banks as the banks are likely to secure their second consecutive record profit year, in the analysts’ view.
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The analysts have kept “outperform” ratings on DBS, OCBC and UOB, with transaction success rates of 25%, 15% and 35%, respectively.
Meanwhile, the RHB research team notes that Singapore banks’ 2QFY2024 saw a “milder-than-expected” q-o-q decline in trading and investment income.
“Amid a scenario of flattish earnings as the interest rate cycle turns, we think the focus should be on dividend yields and dividend per share (DPS) growth,” says the RHB research team.
While DBS’s and OCBC’s results exceeded the RHB team’s expectations, UOB’s remained in line.
The RHB research team notes that their 2QFY2024 operating income eased 1% q-o-q but was up 5% y-o-y, due to lower non-interest income while was down 5% q-o-q and up 10% y-o-y.
This came on the back of trading and investment income moderating from the high base in 1QFY2024.
On the other hand, NII remained “broadly stable” q-o-q with asset growth partly offset by slight NIM compression, while fee income stayed “healthy”.
Meanwhile, the sector’s operating expenditure rose 2% q-o-q while up 4% y-o-y.
They add: “As such, while cost income ratio ticked higher to 40.5% from 39.4% in 1QFY2024, the ratio was stable y-o-y.”
In 2QFY2024, sector profit after tax and minority interest (patmi) dropped 4% q-o-q, but was up 7% y-o-y.
Sector loans credit cost remained stable q-o-q at 18 bps while gross impaired loans ratio improved to 1.17% from 1.2%, as at end-1QFY2024.
The RHB team also notes that despite the positive earnings surprise, with the exception of DBS, guidance and targets were retained.
“Given the operating expenditure discipline displayed and mild asset quality environment, DBS lowered its CIR guidance to approximately 40% (from low-40%) while its specific provision (SP) charge was guided lower to 10 bps to 15 bps (from 17 bps to 20 bps),” says the team.
As a result, the team highlights that DBS has since raised its 2024 patmi growth expectations a mid-to-high single digit growth from “above 2023 levels”.
Moving forward, the RHB team notes that Singapore banks have been focused on protecting NII ahead of the rates downcycle by adding duration and fixed rate assets to their portfolios.
Currently, NII sensitivity stands at $4 million to $5 million per bp change, or approximately 3% (DBS) to 7% (UOB) impact to profit before tax for 100bps change in rates.
Other mitigating factors identified by the team include potentially improved volumes and wealth management opportunities, as well as lower credit cost.
They add: “On the non-interest income 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.”
Overall, the RHB research team has raised the estimates for FY2024 patmi by around 3% for DBS, while OCBC was upgraded by 2% - 4%.
Sector patmi was similarly revised up by 1% to 2%, while the team expects sector FY2024 patmi to rise by 6% y-o-y, despite being a moderation from 2023’s increase of 25% y-o-y.
