All three Singapore banks are expected to post a “robust” set of earnings on a q-o-q basis for the 3QFY2024 ended Sept 30, says DBS Group Research analyst Lim Rui Wen.
This is likely to be driven by non-interest income, although the valuations of the banks’ commercial real estate (CRE) portfolios have to be watched, she adds.
“Based on our channel checks, Singapore banks continued to benefit from growth in assets under management (AUM) and increased investment activity in 3QFY2024 which is positive for wealth fees,” Lim writes in her Nov 1 report. “We believe Oversea-Chinese Banking Corporation (OCBC) and United Overseas Bank U11 (UOB) will keep enjoying strong contributions from trading and investment income during 3QFY2024, driven by non-customer flow as well as customer flow revenue.”
While the banks’ asset quality continues to be benign, the analyst notes that the market valuations of Hong Kong CRE have dipped by up to 40% from the peak, which implies the risk of adjustments to provisions as CRE collateral valuations get reviewed, she adds.
Across the banks, UOB is also likely to be the outperformer for net interest margins (NIMs) due to active NIM management.
In 2QFY2024, DBS Group Holdings’ NIM remained flat q-o-q while OCBC’s NIM fell by 7 basis points over the same period. Meanwhile, UOB’s NIM improved by 3 basis points q-o-q then.
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Even though the US Federal Reserve (US Fed) cut its rates by half a percentage point in September, this is likely to have a minimal impact on the banks’ 3QFY2024 NIMs, says Lim. “We expect UOB’s 3QFY2024 NIM to be stable q-o-q, while OCBC’s 3QFY2024 NIM is likely to see a smaller decline q-o-q, as it continues to face pressure in asset yields and cost of funds.”
At the same time, high long-end yields will continue to bode well for banks. “While there are previous concerns that a declining rates environment will impact banks’ earnings, Singapore banks’ sensitivity to interest rate cuts has been reduced by [over] 40% compared to the previous cycle,” says the analyst.
There are two reasons behind the reduction in the banks’ sensitivity to rate cuts. The first is the different nature of their books. “Singapore banks are now proactive in managing durations and taking on more fixed-rate assets, which lowers sensitivity during rate cuts, as the floating-rate loan proportion is smaller,” Lim explains.
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The banks’ sensitivity is also limited on the downside with many customers converting from their current accounts and savings accounts (Casa) to fixed deposits, which have enjoyed high yields, especially in the last two years, she adds.
At this point, as the Fed continues to frontload easing, the risks of a US hard landing diminish significantly, says the analyst. “With high 10-year treasury yields, which are above 4%, reflecting a soft-landing narrative, this continues to support banks’ share prices.”
Attractive forward dividend yields remain a ‘bright spot’
The banks’ attractive forward dividend yields of up to 6.3% remain a bright spot for the sector, says Lim. This is in addition to the potential for higher dividends and undemanding valuations, which continue to be supportive to the banks’ share prices.
In 3QFY2024, the analyst expects the banks to report a higher common equity tier 1 (CET-1) ratio of up to 150 basis points to 200 basis points on a transitional basis following the implementation of Basel IV rules.
Among the banks, Lim prefers UOB as she keeps her “buy” call and target price of $34.50. She has also kept her “hold” rating for OCBC with an unchanged target price of $14.90.
Shares in DBS, OCBC and UOB closed at $39.09, $15.11 and $32.13 on Nov 5.
