Amid the higher interest rate environment and ahead of the three Singapore banks’ results for the 3QFY2022 ended Sept 30, analysts are expecting expansions in net interest margins (NIMs) to boost the results of all three banks during the quarter.
United Overseas Bank (UOB) will lead the trio with its results released on the morning of Oct 28. DBS Group Holdings will follow suit on Nov 3 while Oversea-Chinese Banking Corporation (OCBC) will round up the trio’s results on Nov 4.
CGS-CIMB expects high NIM rates to lift banks’ earnings in the 3QFY2022
In the 3QFY2022, CGS-CIMB Research analysts Andrea Choong and Lim Siew Khee expect the delayed NIM expansion to finally “come through more substantially” for the banks in the quarter’s earnings.
“Although snaking queues to place fixed deposits (FDs) at multi-year high rates hint at continued outflow of current account savings account or CASA (into FDs and higher yielding instruments such as Singapore Savings Bonds, T-bills, etc.) as we saw in 2QFY2022, the simultaneous repricing of loan portfolios on higher benchmark rates should still provide a sizeable 24-30 basis point (bps) q-o-q boost to NIMs in 3QFY2022,” they write, noting that the average quarterly three-month SIBOR, three-month SORA and the three-month LIBOR rose 1.27%, 0.97% and 1.5% respectively.
SIBOR stands for the Singapore Interbank Offered Rates while SORA stands for the Singapore Overnight Average. LIBOR stands for the London Interbank Offer rate.
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That said, the analysts expect loan growth in the 3QFY2022 to slow with a q-o-q growth of just 1%. This is given the weaker sentiment amid recession risks, they write.
At the same time, fee income under non-interest income could stay flattish, weighed down by soft wealth management volumes. Meanwhile, trading income may benefit from the heightened activity due to the volatile market conditions.
Credit costs, including management overlay top-ups, could also normalise upwards at around 15 to 23 bps in the 3QFY2022 from the 4 to 21 bps in the quarter before.
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On the individual banks’ performance, the CGS-CIMB analysts expect DBS to see 30 bps growth q-o-q in its NIM to 1.88% in the 3QFY2022, bringing its 3QFY2022 net profit to $2.05 billion, up 21% y-o-y and 13% q-o-q.
“We understand that DBS’s NIM sensitivity to Fed rates guidance (previously $18 million-$20 million per 1 bp of Fed rate hike) may be revised downwards given larger CASA outflows (higher funding cost pressures) as Fed rates exceed 3.5%,” they write.
At the same time, the analysts expect DBS’s non-interest income to remain “relative stable”. The bank’s operating expenses (opex) is also expected to remain stable.
“On balance, the bank’s stronger topline could tip its Common Equity Tier-1 (CET-1) ratio lower towards 40% in 3QFY2022. We pen in [around] 15 bps credit costs in 3QFY2022 which include a top-up in management overlays,” they write.
OCBC is expected to record a net profit of 3QFY2022 of $1.6 billion, which is up 31% y-o-y and 9% q-o-q, say the analysts.
“Contrary to the bank’s expectations that NIM expansion could slow in 2HFY2022 (given that it outperformed peers in 2QFY2022), we understand that margins could continue widening as the boost to asset yields (e.g. on short-term trade facilities) outpaces the shift from CASA into higher-yielding instruments,” the analysts write. For the quarter, they are expecting OCBC’s NIM to increase by 24 bps q-o-q to 1.95%.
To them, OCBC’s fee income is likely to remain flattish as sentiment on investment banking (IB), bancassurance and wealth management was unchanged q-o-q, or “weak”, as the analysts see it.
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OCBC’s opex is also expected to be higher as the bank adjusted its staff wages in the 2QFY2022.
“A normalisation of credit costs towards the lower end of [around] 20-25 bps in FY2022 may be expected, translating to 23 bps in 3QFY2022, in our estimate,” the analysts write. “We understand OCBC has no particular M&A target in Indonesia at this juncture.”
For the 3QFY2022, UOB is expected to post a net profit of $1.26 billion, which is up 21% y-o-y and 13% q-o-q. This is driven by NIM expansion coming in above the bank’s management’s initial guidance of 20 bps in the 2HFY2022.
To this end, Choong and Lim expect UOB’s NIM to rise 27 bps q-o-q to 1.94% in the 3QFY2022.
“Although UOB has been aggressive in offering market-leading FD rates, this has been in anticipation of rates further rising going forward,” they write. “We think its fee income could remain moderate as wealth management sentiment stays soft, but trading and investment income (from heightened hedging activity) could compensate for this.”
“Watch out for higher opex for wage adjustments and new headcount, though CET-1 should remain contained at 43-44%. A chunky non-performing loan (NPL) writeback (property exposure) should result in lower impairments in 3QFY2022; we expect 12 bps,” they add.
In their Oct 17 report, Choong and Lim have retained their “overweight” recommendation on the Singapore banking sector with “add” calls for all three banks.
The analysts have given DBS, OCBC and UOB target prices of $40.20, $15.50 and $35.60 respectively.
DBS looks forward to higher dividends from the banks in FY2022
DBS Group Research analyst Lim Rui Wen is also remaining positive on Singapore banks as she expects them to report a strong set of results for the 3QFY2022.
“While investors remain concerned over an overly hawkish Fed and recession risks, we believe valuations will continue to draw support from strong earnings growth and high provision coverage levels,” she writes.
In her report dated Oct 20, Lim is expecting Singapore banks’ NIMs to perform better than expected in the 3QFY2022 compared to their managements’ previous guidance.
“[This is as] asset yields continue to reprice, strongly driving 3QFY2022 earnings, with average three-month SIBOR and three-month SORA overnight index swap (OIS) having seen 125 bps and 146 bps increases q-o-q, respectively,” Lim writes.
On this, the analyst estimates that NIM improvements q-o-q across the banks will land in the range of around 20 to 30 bps.
“This is likely to be a record quarterly improvement for the banks. While the cost of deposits will be on the rise with CASA expected to decline, the effect of higher loan yields still dominates,” she writes.
Meanwhile, Lim sees the performance of the banks’ non-interest income as “largely mixed”.
“As market sentiment continues to be weak, we expect wealth management fees to continue to be soft during 3QFY2022, while card fees remain robust due to the reopening of borders and resumption of activities,” she says.
“Customer flow for trading is expected to be firm in 3QFY2022 on the back of healthy customer levels and higher hedging activities in the rising rate environment. We expect non-interest income to be largely flattish q-o-q,” she adds.
Asset quality is also expected to remain benign during the 3QFY2022, based on Lim’s channel checks.
“We expect provisions to normalise in 2HFY2022 as macroeconomic risks persist, as 1HFY2022 provisions have been low, except for UOB,” she says. “We expect UOB to reverse the provisions written for Shimao previously in 3QFY2022. FY2022 provisions are likely to come in below the banks’ guidances, unless the macroeconomic outlook worsens drastically.”
In the FY2022, Lim is looking forward to the banks reporting higher absolute dividends on a stronger FY2022 earnings base and undemanding valuations.
RHB keeps ‘buy’ on OCBC on tailwinds from NIM expansion
The Singapore research team at RHB Group Research is keeping its “buy” call with a target price of $13.90 as it sees “tailwinds” from expansions in its NIM.
“OCBC Bank’s share price is up a modest 2% year-to-date (ytd), giving up almost all of the 18% gain in early 2022,” the team writes. “That said, we believe the stock will continue to outperform the broader market helped by healthy NIM expansion and its decent dividend yield.”
The NIM expansion is the bright spot in the bank’s results, with the RHB team expecting OCBC’s NIM expansion to be even wider in the 3QFY2022 compared to the previous quarter.
“The sustained rise in interest rates will have a positive impact on NIM, which would in turn lift net interest income notwithstanding the weakness in loan demand,” the team writes.
However, the team adds that the uncertain global outlook has remained a drag on OCBC’s fees and commissions income in the 3QFY2022 as the bearish tilt in equity markets hurt demand for wealth products, with customers remaining “risk-off”.
Overall, the team expects OCBC’s net fees and commissions for the 3QFY2022 to remain unchanged q-o-q at $477 million, or a 16% y-o-y decline.
In addition, OCBC’s 3QFY2022 credit cost will normalise from the low 7 bps in 1HFY2022.
“Against guidance of 20-25bps for FY2022, this would mean credit cost of 33 bps per quarter in 2HFY2022. Still, asset quality is healthy and OCBC is not seeing stress in its loan portfolio,” the team adds. “Management believes its residential mortgages would not be impacted by the rising interest rates. About 80% of its Singapore housing loans are owner-occupied purchases. Furthermore, group loan-to-value for housing loans is a low 50%.”
Shares in DBS, OCBC and UOB closed at $32.39, $11.53 and $25.99 respectively.
