What lies ahead for Singapore’s banks as earnings peak? DBS Group Research analyst Lim Rui Wen delves into the question on investors’ minds as local banks prepare to announce their earnings for 1HFY2023 ended June.
Lim expects most banks to continue their q-o-q net interest margin (NIM) decline in 2QFY2023, even as fixed deposit rates start to decline. “We believe further rate hikes will limit loan yields upside; DBS Group Research expects a final 25 basis points (bps) rate hike to take place in July, with competition for high quality loans on the rise. While fixed deposit rates had started to decline during 2QFY2023, the higher rates locked in will continue to weigh on 2QFY2023 NIMs.”
In a July 20 note, Lim maintains “hold” on both UOB and OCBC, with target prices of $30.30 and $13 respectively.
Loan growth and fee income are largely weak in a risk-off environment, she notes. “With system loans in Singapore remaining flattish in the months since end-March 2023, we continue to expect muted loan growth from the Singapore banks during 2QFY2023.”
As of 1QFY2023, DBS, OCBC and UOB recorded loan growth of +1%, flat and -1% q-o-q respectively. Year-to-date to end-May, loans in Singapore had declined by 1.6%, while being flat in the two months after end-March.
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Banks had started to downgrade loan growth guidance during 1QFY2023; DBS loan growth guidance was downgraded to 3%-5% from mid-single digit, while OCBC and UOB downgraded to low-to-mid single digit from mid-single digit.
Meanwhile, Lim expects non-interest income to be mixed across banks as fee income may continue to see a drag from weak market sentiment, though strong customer-related treasury income “should buffer” overall non-interest income.
During 1QFY2023, fee income across DBS, OCBC and UOB saw broad-based growth of +21%, +14% and +14% q-o-q respectively from 4QFY2022’s seasonal low. This was largely driven by stronger wealth fees, notes Lim, but was still short of pre-Covid-19 levels. “We believe the uncertainty in market outlook and Fed trajectory continues to limit improvements for wealth activities.”
On the loans themselves, Lim notes that concerns over asset quality risks “abound”. Asset quality appears benign in meantime, and Lim expects q-o-q 2QFY2023 net profit decline for OCBC and UOB.
As of 2QFY2023, DBS’s exposure to offices in developed markets accounted for some 4% of its total commercial real estate portfolio.
For OCBC, the exposure was higher, at 10% of its real estate loan book or 3% of its total loan book, but mainly for network customers.
For UOB, its ex-Singapore and Hong Kong book in developed markets accounted for some 7% of its real estate book and 2% of its total loan book.
There continues to be concerns over asset quality risks of Singapore banks, says Lim, particularly for the commercial real estate segment, though average loan-to-value ratio (LTV) across the banks remains healthy at 40%-60%.
Lim looks towards a normalisation in overall credit costs in FY2023. OCBC guided for 15 bps to 20 bps at 1QFY2023 from 16 bps at 4QFY2022, while UOB increased guidance to 20 bps to 25 bps during 1QFY2023 from 20 bps during 4QFY2022.
Overall, Lim does not see any immediate catalysts on the horizon for Singapore’s banks, although valuations of OCBC and UOB remain undemanding at some 0.95x FY2024 price-to-book value (P/BV).
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The banks also sport high dividend yields of 5.8%, and strong provisions buffer continue to support share prices, limiting downside in the near term, she adds.
That said, Lim prefers Indonesia’s banks “as expected strong loan growth continues to support net interest income and earnings”.
As at 10.07am, shares in DBS are trading 8 cents higher, or 0.25% up, at $32.52; while shares in OCBC are trading 4 cents higher, or 0.32% up, at $12.68; and shares in UOB are trading 3 cents lower, or 0.11% down, at $28.33.
