PhillipCapital Research senior analyst Glenn Thum is staying “overweight” on Singapore’s three banks despite “mixed” performance in February, with shares in DBS Group Holdings up 4.7% and shares in United Overseas Bank U11 (UOB) down 1.4%.
“In comparison, DBS was the best performer, likely due to the increase in dividends and 1-for-10 bonus share issue, which would boost their dividend yield to 7.2%,” writes Thum.
In a March 11 note, Thum remains “positive” on banks, maintaining “buy” on all three local bank stocks following the release of their results for FY2023 ended Dec 31, 2023. “Net interest margins (NIMs) may see flat growth despite the higher-for-longer interest rate environment, but a recovery in loan growth and fee income will uplift profits.”
In addition, Thum thinks bank dividend yields are “attractive”, with upside surprises due to excess capital ratios and a push towards higher returns on equity (ROEs).
Thum has target prices of $38.90 for DBS, $14.96 for Oversea-Chinese Banking Corporation (OCBC) and $34.90 for UOB.
4QFY2023 results highlights
Thum notes three similarities across the banks’ results. Firstly, net interest income (NII) growth declined as NIM stagnated.
DBS’ 4QFY2023 adjusted earnings of $2.39 billion were slightly above Thum’s estimates, and FY2023 adjusted patmi was 102% of his FY2023 forecast.
DBS’s 4QFY2023 dividend per share (DPS) was raised 29% y-o-y to 54 cents with an additional 1-for-10 bonus issue, and the dividend payout ratio was higher at 48.5% in FY2023, compared to 47.7% in FY2022 excluding special dividends.
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NII rose 5% y-o-y to $3.4 billion due to an 8-basis point (bp) y-o-y NIM increase to 2.13% as interest rates continue to remain high despite loan growth remaining flat y-o-y, says Thum.
DBS has provided FY2024 guidance of NII to remain at the same levels as FY2023, with NIMs to be maintained at FY2023 exit NIM level with a possibility of a few bps drop.
NII will be supported by the full-year impact of the Citi Taiwan consolidation and some tradeoff between NIMs and loan growth, with the guidance of low-single-digit loan growth for FY2024. FY2024 patmi to be maintained at around the current levels in FY2023.
Meanwhile, OCBC’s 4QFY2023 earnings of $1.62 billion met Thum’s estimates; it came from higher fee income and stable NII. FY2023 patmi was 100% of his FY2023 forecast.
4QFY2023 DPS was up 5% y-o-y to 42 cents. FY2023 dividend rose 21% y-o-y to 82 cents, with the dividend payout ratio “stable” at 53%, he adds.
NII growth was led by a 4% increase in average assets, which was offset by NIM moderating by 2bps y-o-y to 2.29% and stable loan growth. NIM moderation was mainly from higher funding costs, which offset the increase in asset yields.
OCBC has provided FY2024 guidance for NIM to be in the range of 2.20% to 2.25%, with FY2023 exit NIM currently at 2.26% and loan growth of low-single-digit for FY2024.
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UOB’s 4QFY2023 adjusted earnings of $1.50 billion were slightly above Thum’s estimates, and FY2023 adjusted patmi was 102% of his FY2023 forecast.
4QFY2023 DPS was up 13% y-o-y to 85 cents; the full-year FY2023 dividend rose 26% y-o-y to 170 cents, with the dividend payout ratio stable at 50%. NII dipped 6% y-o-y from NIM, falling 20bps y-o-y and 7bps q-o-q to 2.02%, mainly from loan margin compression due to competition for high-quality credits and loans remaining flat y-o-y.
UOB has guided loan growth to a low-single-digit and NIM of around 2% for FY2024. UOB expects to see demand for loans pick back up with rate cuts expected in 2H2024 and is guiding for loans to grow 1%-3% in Singapore and 4%-5% in the region.
“However, we expect a slowdown in the first few quarters of FY2024 as rates remain high, with the recovery expected in 2H2024,” writes Thum.
Banks’ forecasts for NIM, loan growth and credit costs compared to PhillipCapital Research’s forecasts
Fee income recovery
Secondly, banks’ fee income continue to recover strongly, says Thum.
DBS’ 4QFY2023 fee income rose 31% y-o-y to $867 million. Wealth management fees increased 41% y-o-y, driven by strong net new money inflows as customers shifted deposits into bancassurance and investments.
In comparison, card fees grew 27% y-o-y from higher spending and the integration of Citi Taiwan. Loan-related fees rose 80% y-o-y, and investment banking fees rose 26% y-o-y, offset by a 4% y-o-y decline in transaction fees as trade finance slowed.
DBS is guiding for double-digit fee income growth for FY2024, which will be sustained by wealth management and credit card fees.
Meanwhile, OCBC’s 4QFY2023 fee income rose 15% y-o-y to $460 million. This was due to the broad-based growth in wealth management fees from increased customer activities, higher credit card fees, and loan and trade-related fees.
Furthermore, the Group’s FY2023 wealth management income grew 26% y-o-y to $4.3 billion and contributed 32% to the Group’s total income FY2023 (FY2022: 30%).
OCBC’s recent acquisitions of PT Bank Commonwealth in Indonesia will accelerate its growth in Asean, says Thum. “Therefore, we are expecting fee income growth of 12% for FY2024.”
UOB’s 4QFY2023 fees grew 17% y-o-y, largely due to higher credit card fees, which hit a new record of $125 million, up 69% y-o-y, boosted by higher card spending on an enlarged regional franchise due to the Citi integration.
Wealth management fees recovered “modestly” by 21% y-o-y, while loan-related fees grew 5% y-o-y amid cautious investor sentiment, notes Thum.
“UOB has successfully integrated their Citi portfolios in Malaysia and Indonesia, with Thailand and Vietnam to be completed by FY2024, which could further expand their regional franchise. As such, they have guided for double-digit fee income growth in FY2024, which could add $220 million to revenue,” says Thum.
Finally, fee income was the growth driver in 4QFY2023, says Thum.
Loan growth decline flattens
Overall loans to Singapore residents, which captured lending in all currencies to residents in Singapore, fell by 1.59% y-o-y in January to $794 billion.
Notably, this is the smallest decline since December 2022, says Thum. “Still, we expect a low-single-digit growth for 2024 as loan growth is expected to turn positive in 2H2024.”
Business loans fell by 2.84% y-o-y in January. Loans to the building and construction segment, the single largest business segment, fell 1.17% y-o-y to $168 billion, while loans to the manufacturing segment fell 11.2% y-o-y in January to $21.2 billion.
Consumer loans grew 0.4% y-o-y in January to $313 billion — the first y-o-y increase recorded since December 2022. Housing loans, which comprise 70% of consumer lending, grew 1.34% y-o-y in January to $226 billion for the month.
Total deposits and balances, which captured deposits in all currencies to non-bank customers, grew by 5.71% y-o-y in January to $1,817 billion. The current account and savings account, or Casa proportion, dipped slightly to 18.1% of total deposits, or $329 billion, down from 18.5% in December.
Shares in DBS closed 15 cents lower, or 0.44% down, at $33.60 on March 11; while shares in OCBC closed 2 cents lower, or 0.15% down, at $13.16; and shares in UOB closed 3 cents lower, or 0.11% down, at $28.27.
Infographics: PhillipCapital Research
