Maybank Kim Eng analyst Thilan Wickramasinghe has maintained his “negative” rating on the Singapore banking sector as investors wait for all three banks to release their trading updates for 3Q2020.
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UOB will be the first to report its quarterly results on Nov 4, while DBS and OCBC will release theirs on Nov 5.
We expect provisioning costs – while remaining high – to see q-o-q deceleration. Non-performing loans (NPLs) may see some upward movement following 1H2020 lockdowns,” says Wickramasinghe in a report dated Oct 16.
He adds that banks should see positive momentum in its fees led by improving wealth management volumes and credit card spending due to rising economic activity and branch openings following the lockdown in 1H2020.
“Stronger market conditions in 3Q should also be supportive of trading income, although these may be several notches below growth level seen by US banks reporting so far,” he says.
Trading income may also see buoyancy, and loan growth is expected to stay positive.
Net interest margins, however, may remain under pressure.
“We will be watching out for management guidance on moratorium trends as well as risks of dividend caps extending to 2021E. Stronger fees and lower credit charges may position DBS with the highest potential of surprising on the upside, while UOB with the least,” he notes.
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To this end, Wickramasinghe expects slower momentum in credit charges following flat figures q-o-q in 2Q2020, though credit charges came in five times higher y-o-y.
This, he says, was primarily attributable to front-loaded cautionary provisioning from adjustments to macro-economic variables (MEV) and management overlays.
“While we expect an element of this to remain, given improved economic activity in 3Q, it should be sequentially lower. The biggest unknown delta may be specific provisions as some credits (especially in frontline Covid-19 sectors) get downgraded. However, ongoing loan moratoriums and government support schemes may delay and offset some of these moves, we believe,” he says.
Wickramasinghe has given DBS a “buy” call with a target price of $22.90, while recommending investors “hold” on to OCBC and UOB, with target prices of $9.06 and $20.79 respectively.
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As at 3.11pm, shares in DBS, OCBC and UOB were trading at $21.38, $8.68 and $19.69 respectively.
