Singapore banks are navigating the downturn, with q-o-q credit cost and net profit improvements expected in the upcoming 3Q20 results, say analysts.
DBS Group Holdings (DBS) and Oversea-Chinese Banking Corporation (OCBC) are scheduled to release their 3Q20 results on Nov 5. United Overseas Bank (UOB) is expected to announce their 3Q20 results on Nov 4.
CGS-CIMB analysts Andrea Choong and Lim Siew Khee are maintaining their ‘neutral’ call on the banks here in an Oct 21 note, recommending ‘hold’ on all three banks with target prices $20.46 for DBS Group, $9.38 for OCBC and $20.58 for UOB.
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Choong and Lim note that both DBS and OCBC should see larger q-o-q credit cost improvements given their more aggressive front-loading of provisions in 1H20.
“We expect a more pronounced credit cost improvement for DBS [and] OCBC. UOB should have upper hand in q-o-q net interest margins (NIMs) (+2bp) compared to approximately -10bp at peers,” write Choong and Lim.
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The expiry of loan moratoriums in Malaysia at end-September and the corresponding repayment trends of this portfolio will likely be a key focus point in 3Q20 in gauging the reliability and conservatism of credit cost guidance provided by banks, write the analysts.
“On balance, we expect repayment trends of OCBC’s and UOB’s Malaysia books to fare relatively well, given the banks’ higher-tiered client segment there (compared to local banks serving mass-market clients).”
“That said, UOB could be a larger beneficiary of improved asset quality indicators given its larger share of Malaysian loans under moratorium (approximately $18 billion) vs. OCBC’s (approximately $13.7 billion). Optimistically, NPL [non-performing loan] formation could fare better than guided as well,” write Choong and Lim.
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The CGS-CIMB analysts prefer UOB for comparably steady treasury income and bottomed-out NIMs, buoyed by optimism of moderation in NPL guidance.
DBS Group Research analyst Lim Rui Wen expects lower asset yields mitigated by the declining cost of funds. In an Oct 21 note, Lim maintains ‘buy’ for UOB and ‘hold’ for OCBC, with target prices $22.20 and $9.30 respectively.
“We believe potential negatives in 3Q20 results for UOB are largely priced in and further improvement in loans under moratorium for UOB should be viewed positively. We remain watchful over potential M&A activity as it continues to apply a discount on its scrip dividend in 2Q20,” writes Lim.
Following the two Fed rate cuts in March 2020 in response to the spread of Covid-19 in the US, average 3MLIBOR and 3MSIBOR continued to slide in 3Q20, notes Lim.
“During the quarter, average 3MLIBOR and 3MSIBOR declined by 35bps and 28bps respectively, moderating from previous quarter’s record decline of 93bps and 83 bps respectively,” Lim adds.
Lim expects lower asset yields alongside lower loan yields in 3Q20 as changes to board rates tend to lag interest rate movements. Based on channel checks, credit spreads continue to remain tight during the quarter.
Lim also notes that from July to August, OCBC, DBS and UOB have cut interest rates on their flagship accounts by between 40-70bps, which will lower cost of deposits.
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On Sept 3, OCBC issued a US$1 billion tier-two subordinated note due 2030 at 1.832% until call date (September 2025) while UOB priced a US$600 million tier-two subordinated note due 2031 at 1.75% until call date (March 2026) as banks leverage on the current low interest rate environment to refinance maturing subordinated notes ahead of time and improve capital adequacy in the interim.
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“Overall, we expect the quarterly decline in NIMs to moderate in 3Q20, as lower asset yields continue to lead decline amidst lowering cost of funds. The exception is UOB, which had previously guided for 2-3bps q-o-q improvement in 3Q20 as the bank has let go of more expensive deposits during the quarter,” says Lim.
To UOB Kay Hian analyst Jonathan Koh, DBS and OCBC are expected to report net profits of $1,106 million (-32% y-o-y and -11% q-o-q) and $922 million (-21% y-o-y but +26% q-o-q) respectively for 3Q20.
In an Oct 19 note, Koh recommends ‘buy’ on both banks as they have less exposure to moratorium loans but have higher loan loss coverage, with target prices $21.39 for DBS and $8.74 for OCBC. Koh maintains his ‘overweight’ call on the sector.
“Loan growth was muted at 6.5% y-o-y and 0.2% q-o-q in 3Q20 due to the slowdown in drawdown for corporate loans and contraction for residential mortgages. We expect NIM to narrow 13bp q-o-q to 1.49% (exit NIM was 1.58% for 2Q20). We expect NIM to stabilise at the current level as the loan book has fully re-priced the drastic drop in interest rates suffered during March,” says Koh.
Koh expects wealth management fees to rebound 15% q-o-q to $350 million (marginally lower by 2% y-o-y) due to increased customer activities with improvement in market sentiment and risk-on appetite to invest in recovery plays.
“We expect contributions from cards to rebound 22% q-o-q to $160 million (still 21% lower y-o-y) due to the recovery in domestic consumption post-circuit breaker. We estimate that total fees and commissions recovered 12% q-o-q but remained 6% lower compared to the previous year,” he says.
On Oct 22, shares in DBS closed 19 cents higher, or 0.89% up, at $21.44; while shares in OCBC closed 1 cent higher, or 0.11% up, at $8.76; and shares in UOB closed 6 cents higher, or 0.30% up, at $19.98.
