Singapore’s banks are “ploughing ahead”, admit CLSA analysts Neel Sinha and Lin Daxin, as the trio’s results for 2QFY2023 ended June beat their estimates by 5%-17%. Among them, DBS D05 was the “most convincing beat of the three”, and the CLSA analysts believe higher dividends “should be a focus”.
In an Aug 7 note, Sinha and Lin maintain “overweight” on all three banks, with target prices of $43.14 on DBS, $16.20 on OCBC and $39.70 on UOB. Among the three, CLSA prefers DBS, followed by UOB and OCBC, in that order; but the house’s target price forecasts the highest upside from UOB at 37.8% against its Aug 6 closing price of $28.80.
Sinha and Lin were relatively more pessimistic compared to the other houses here, as the banks’ results fared -2% to 13% compared to consensus forecasts.
While loans are still “anaemic”, Sinha and Lin note that the banks’ net interest margins (NIMs) are likely to hold higher. “Pre-results, we were expecting NIMs at around 2.06%-2.12% for DBS, 2.23%-2.25% for OCBC and 2.15%-2.20% for UOB. All three were in line or higher boosted by Fed rate hikes late last quarter, initially not expected.”
Now, Sinha and Lin believe NIMs will peak out at end-2023. DBS indicates a possibility of upside bias through 2HFY2023 while OCBC and UOB indicate it should generally hold firm at current levels.
The CLSA analysts note that asset yields have been firm for all three. “The variability on NIMs has more to do with the potential for Fed changing direction and, deposit costs catching up with the customary four- to six-month lag behind asset book repricing.”
Loan growth remains soft, down 1% q-o-q for DBS and up 1% for OCBC and UOB. “DBS [was] affected a tad more as Hong Kong Interbank Offered Rate (HIBOR) has gone up in the past quarter and many of their North Asia [and] Greater China customers find it cheaper to borrow onshore with lower rates and a weaker currency. We expect loan growth [to be] a 2HFY2024 narrative after the Fed cycle turns.”
Wealth still has growth headroom
See also: OCBC reports earnings of $1.71 bil for 2QFY2023 and record 1HFY2023 net profit of $3.59 bil
The banks’ non-interest income, roughly a third of total income, was a mixed bag at -3% to 5% q-o-q growth, say Sinha and Lin.
Wealth and cards were generally the stand-outs while other areas like transaction fees and loan fees were softer due to the macro-environment and Singapore’s property cooling measures, they add.
“We think wealth fees have further upside as net new money inflows have continued to be strong at $7 billion to $16 billion for the three banks,” write Sinha and Lin.
According to them, the estimated assets under management (AUM) for DBS is now at $303 billion, OCBC at $270 billion and UOB at $160 billion. “The fees have not grown at the same pace as AUM in recent quarters given risk aversion in markets and investors choosing to sit on the side-lines with deployment in deposits rather than investments.”
Card fees could also hold some upside too as travel recovery still has some way to go with Singapore arrivals at some 80%-82% of pre-pandemic levels, write Sinha and Lin.
DBS has explicitly mentioned this should be a record year for net profits after tax, say Sinha and Lin. “While the other two banks were not explicit, we expect the same for them.”
Dividends for OCBC and UOB were in line with expectations, while DBS was a 14% positive surprise at 48 cents per share interim dividend, write the CLSA analysts. “Management indicated that the board determined the bank has $1.20/share in excess capital, which it should return to shareholders over a two- to three-year timeframe.”
See also: Non-interest income recovery the next growth lever for local banks: CLSA
Banks as proxy to Asean
Meanwhile, UOB Kay Hian Research analyst Jonathan Koh highlights that the banks are a proxy to growth in Asean countries. “Asean countries have a large combined population of 680 million and account for about 8% of global exports. Many multinational companies have adopted the China+1 strategy and plan to set up alternative production facilities within the Asean region.”
Malaysia, Thailand, Indonesia and Vietnam are seeing growth in foreign direct investments, writes Koh. OCBC and UOB benefit from the reorientation of supply chains due to their extensive network within Asean countries.
In an Aug 7 note, Koh maintains “overweight” on DBS and OCBC with target prices of $44.35 and $18.22 on DBS and OCBC respectively. OCBC is his top pick for its new dividend policy with a payout ratio of 50%, as well as its focus on Asean a “defensively low” 2024 price-to-book ratio (P/B) of 1.03x.
DBS and OCBC outperform in NIM expansion, says Koh. DBS and OCBC registered more sizeable NIM expansions of 58 basis points (bps) and 55 bps y-o-y respectively in 2QFY2023, compared to UOB’s 45 bps. “We attribute the steeper NIM expansion to DBS’s and OCBC’s higher current accounts and savings accounts (CASA) ratios of 56% and 45% respectively, [compared to] UOB’s 48%.”
Thus, DBS and OCBC were able to achieve stronger growth in net interest income of 40% and 40% y-o-y respectively, compared to UOB’s 31% y-o-y growth.
DBS outperforms in fee income generation, adds Koh. “DBS’s fee income grew 7% y-o-y, the first y-o-y increase in six quarters, with the recovery led by wealth management and cards. OCBC and UOB saw fee income languish by -10% and -8% y-o-y respectively. Their wealth management fees also declined 16% and 3% y-o-y respectively.”
As at 12.24pm, shares in DBS are trading 23 cents lower, or 0.67% down, at $34.07; while shares in OCBC are trading 6 cents higher, or 0.46% up, at $13.22; and shares in UOB are trading 9 cents higher, or 0.31% up, at $29.05.
