RHB Bank Singapore is maintaining its neutral rating on the Singapore banking sector after all three banks have reported their results for the 3QFY2023 ended Sept 30. OCBC is the team’s preferred pick.
The sector’s operating income stood flat on a q-o-q basis and rose by 13% y-o-y in the 3QFY2023 as net interest income (NII) growth was offset by the weaker non interest income mainly due to other non interest income.
Meanwhile operating expenses (opex) inched up by 1% q-o-q, putting the sector’s cost-income ratio (CIR) at 41.1% versus 40.6% at 2QFY2023. This was, however, compensated by a 6% q-o-q decline in loan allowances as all three banks released their general provisions (GPs).
For the 9MFY2023, earnings for the banks surged by 31% y-o-y on stronger operating income and positive jaws as CIR improved to 40.4% from 43.9% in the 9MFY2022.
Guidance for the banks stood largely unchanged although OCBC increased its NIM guidance slightly and lowered its CIR target while reducing loan growth expectations. Overall, the impact is largely neutral to bottomline, says the RHB team.
It also notes that commentary from the three banks suggest that net interest margin (NIM) for the 3QFY2023 may have been the peak.
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Potential NIM pressures ahead include competitive pricing faced for both loans and deposits given the weak loan growth and seasonal year-end competition and repricing.
“As for asset quality, despite higher specific provisions (SP), banks shared that their portfolios look healthy with no visible systemic issues. The commercial real estate and Greater China property exposures continue to be discussed, but despite potential pockets of vulnerabilities, Singapore banks remained comfortable with their overall books, citing low loan-to-value (LTV) ratios and strong borrower quality,” says the team.
“Finally, on the current money laundering case, DBS booked $100 million in SP for its property exposure whereas OCBC said its exposure was insignificant,” it adds.
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In FY2024, United Overseas Bank U11 (UOB) was more optimistic on NII guiding for high single-digit loan growth and stable NIM while DBS and OCBC were “more guarded”.
“Elevated interest rates will help prop up NIMs but at the expense of credit demand and potential asset quality softness, whereas rate cuts will be negative for NIM but the flipside is potentially stronger loan growth,” says the RHB team.
“DBS and UOB were positive on Non-II outlook. Resilient consumer spending trends should support card fees. Singapore banks enjoyed strong net new money inflows this year, and improved investor sentiment and wealth management activities would be a further positive for fees. Credit cost is expected to rise next year. All-in, DBS thinks its core patmi could stay flat,” it adds.
Overall, the team has kept its earnings forecasts for all three Singapore banks.
“We estimate FY2023 sector earnings growth of 26%, mainly on NIM expansions, but forecast FY2024 earnings to stay flat on a 6 basis points (bps) NIM compression and higher cash on cash (coc) of 20bps versus FY2023’s 17bps. We maintain our view that the tailwinds for Singapore banks are waning,” says the team.
“A peaking rates cycle, coupled with potential rate cuts in 2HFY2024, means that the sector’s earnings momentum is expected to stall in FY2024. However, as long as bottomline is elevated, this is supportive of dividend yields,” it adds.
Shares in DBS, OCBC and UOB closed at $31.74, $12.54 and $27.22 respectively on Nov 30.
