As Singapore’s three banks enter the final month of FY2024, DBS Group Research analyst Lim Rui Wen thinks there is “higher earnings visibility” in FY2025, thanks to lower net interest income (NII) sensitivity to US Federal Reserve rate cuts and slower pace of cuts overall.
The banks are not due to report their results for FY2024 ended Dec 31 until February 2025, but Lim is looking forward to “more active capital plans to be announced”. “Higher dividend yields, more share buybacks are likely to support further sector rerating.”
Singapore banks are increasing their fixed-rate assets and extending their loan book duration, according to results for 3QFY2024, and NII sensitivity to rate cuts have continued to decline for Oversea-Chinese Banking Corporation (OCBC) and United Overseas Bank U11 (UOB), says Lim in a Nov 29 note.
According to Lim’s estimates, each 25 basis point (bp) rate cut is estimated to reduce Singapore banks’ FY2025 earnings by 1%-2%, with banks guiding for an NII impact of $2.8 million to $5 million per bp.
During 3QFY2024, DBS’s net interest margin (NIM) declined 3bps q-o-q, while OCBC’s declined 2bps q-o-q while UOB recorded stable NIM q-o-q.
NIM sensitivity has decreased by some 40% for OCBC and UOB compared to the previous cycle, while DBS’s NIM sensitivity is now reduced to $4 million per bp of rate cuts, from $18 million to $20 million during 2021.
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DBS Group Research economists see another 25bps cut in December, followed by 100bps through 2025. “An average [loan] duration of two [to] three years supports earnings stability through the rate cut cycle. As risks skew to [a] lesser and slower pace of rate cuts, this may provide upside in FY2025,” she adds.
With US President-elect Donald Trump’s victory, the rates space has to contend with potential additional tariffs, corporate tax cuts and fiscal worries, says Lim. “These would likely keep long-end US yields buoyant, which will continue to support banks’ share prices.”
Loan growth
Rate cuts may spur loan growth in FY2025, says Lim. “Based on our channel checks, interest in new loans has picked up. With a soft landing expected for the US economy and renewed optimism in China’s supportive macroeconomic policies, we believe that modest cuts are likely to spur loan growth in FY2025, notwithstanding a recession scenario. This will buffer any decline in NII.”
As of September, system loan growth in Singapore is up 1.4% year-to-date, while loan growth is up 0.8% y-o-y, driven by 1.9% y-o-y growth in consumer loans, while business loans was up 0.4% y-o-y.
DBS, OCBC and UOB loans grew 0.5%, 2.9% and 4.0% year-to-date to September respectively.
“DBS has continued to see corporate repayments while OCBC and UOB benefitted from loan growth in Malaysia and Asean respectively,” notes Lim.
Alongside the expansion of two Singapore integrated resorts — with Marina Bay Sands reportedly seeking a loan deal size of $12 billion — Singapore banks continue to indicate there is a good regional loan pipeline for FY2025 spanning various sectors, including data centres, semiconductors and property.
DBS and UOB are guiding for mid-single-digit loan growth and high-single-digit loan growth for FY2025 respectively. Lim forecasts Singapore banks’ loan growth to be 6%-7% in FY2025.
Asset quality continues to remain benign through FY2024 thus far, with the exception of UOB Thailand having some asset quality issues in Thailand in relation to Citi Thailand integration issues. UOB also had another 20% of specific allowances attributed to collateral revaluations in HK commercial real estate in 3QFY2024.
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“Overall, we believe the trend of benign asset quality will continue into FY2025. We expect credit costs to fall within the respective FY2025 management guidances with no surprises assuming a calibrated soft landing in [the] global economy,” says Lim.
DBS has guided for higher specific credit costs of 17-20bps and expects more potential recoveries for its oil and gas portfolio going forward, while UOB has guided for total credit costs at the lower end of 25-30bps.
Prefer UOB over OCBC
Lim prefers UOB over OCBC, with a “buy” call and a $37.90 target price. “We believe higher return on equity (ROE) trajectory alongside active capital management plans to return capital to shareholders are positives for the stock. [UOB’s] share price remains well-supported by its strong provisions buffer of 99% and forward dividend yield of 6% with potential upside for higher dividends.”
Lim is anticipating a $2 billion share buyback programme to be announced by UOB during its FY2024 results briefing, “which will continue to bolster UOB’s shareholder returns”.
Meanwhile, Lim has a “hold” call on OCBC with a target price of $16.10. “We prefer UOB to OCBC as we await more clarity on OCBC’s capital management plans, alongside uncertainty from the current voluntary unconditional general offer for Great Eastern, which may weigh on its capital plans.”
As at 10am, shares in UOB are trading 9 cents higher, or 0.25% up, at $36.45; while shares in OCBC are trading 1 cent higher, or 0.06% up, at $16.29.
