Come earnings season in February, all eyes will be on what Singapore’s three banks plan to do with their excess capital, which CGS International (CGSI) Research analysts Andrea Choong and Lim Siew Khee estimate at between $2.5 billion and $4 billion each.
Choong and Lim think DBS Group Holdings may declare a special dividend of some 50 cents per share, while United Overseas Bank (UOB) could initiate a share buyback programme worth some $2.5 billion.
The CGSI analysts think DBS will declare a final dividend of 60 cents per ordinary share for 4QFY2024 ended Dec 31, 2024, while Oversea-Chinese Banking Corporation (OCBC) will declare 45 cents per share, and UOB will declare 95 cents per share.
Still, Choong and Lim remain “neutral” on the sector, with 4QFY2024 earnings likely affected by seasonal softness. “Fees could slow while treasury income may be less exuberant.”
Among the three banks, the CGSI analysts prefer DBS, though with a “hold” call and a $43 target price, which is below DBS’s current share price. “We estimate that DBS had $2 billion in management overlays as at end-2Q2024. The asset quality risks of its onshore mainland China property exposure (less than 1% of group loans) remain contained, in our view, as the majority of its loans are extended to China state-owned enterprises,” they write.
The analysts’ second-choice pick is OCBC, with an “add” call and a target price $17.70. “OCBC’s robust common equity tier-1 (CET-1) of 16% as at end-2Q2024 remains a key advantage, whether for M&As or to cushion against asset quality deterioration, in our view.”
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Finally, CGSI has an “add” call on UOB with a target price of $39.50. “We believe write-backs of management overlays are unlikely until asset quality concerns (due to the elevated interest rate environment) blow over. The bank has not detected any significant stresses in its loan portfolio thus far.”
DBS will announce its results on Feb 11, followed by UOB on Feb 19 and OCBC on Feb 26.
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Fed cuts
CGSI thinks net interest margin (NIM) performance was mixed across banks, with DBS likely recording a small expansion, and OCBC and UOB slipping. “While the 50 basis point (bps) US Fed Funds rate cut in November and December 2024 may be more noticeable only in 1QFY2025-2QFY2025, the 25bp rate cut in September 2024 could weigh slightly on asset yields.”
Fee momentum was likely dampened all round, say Choong and Lim, with wealth management income pulling back as well. “In the same vein, market-related treasury income is likely to have been softer. In the upcoming 4QFY2024 earnings briefings, an update on banks’ outlook for FY2025 and capital management strategies will be investors’ key focus.”
OCBC’s insurance income could rebound
Meanwhile, Choong and Lim expect OCBC to post 4QFY2024 net profit of $1.8 billion, down 7% q-o-q but up 13% y-o-y.
They think OCBC’s NIM could slip 3bps q-o-q to 2.15% as the Fed fund rate cut in September 2024 weighs on asset yields.
OCBC reiterated that its FY2024 NIM should still trend at 2.2%. While the bank actively manages its funding costs downwards, CGSI thinks the effects may take time to materialise.
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Loan growth likely stayed muted in 4QFY2024 as customers adopted a “wait-and-see” approach to investment decisions, say CGSI’s analysts. “We expect a seasonally lower quarter of fees, with the wealth management segment not being spared. Treasury income likely trended lower in tandem.”
While OCBC remains watchful on its commercial real estate portfolio, CGSI anticipates “stable” credit costs of 22bps in 4QFY2024. In its 3QFY2024 earnings briefing, the bank said that dividends, and not share buybacks, are OCBC’s preferred method of shareholders’ returns.
CGSI estimates that OCBC has $3.6 billion in excess capital, which implies a potential return of up to 80 cents in dividends per share (DPS).
UOB’s softer NIMs
CGSI expects UOB to post 4QFY2024 net profit of $1.44 billion, down 12% q-o-q and down 4% y-o-y. “We think NIM could slip 2bp q-o-q to 2.03% in 4QFY2024 as asset yields get repriced on lower interest rates. Nonetheless, net interest income (NII) may still hold steady given a pick-up in loan growth that was broad-based across the retail and wholesale segments.”
On wealth management, investment activity and client enquiries were present over the quarter, but at a slower pace, according to UOB. “We anticipate softer treasury income q-o-q in 4QFY2024, normalising from its peak in 3QFY2024 amid very favourable market conditions.”
According to CGSI, residual Citi integration costs remain and they expect $28 million of such costs in 4QFY2024.
Overall cost-to-income ratio could be higher at 45% in 4QFY2024, largely due to softer income. “We understand that there were some office asset sales in the Hong Kong commercial real estate space that resulted in higher specific provisions as assets were marked down to their realised values in 4QFY2024.”
CGSI thinks some of its management overlays — or general provisions — may have been used as a buffer against these impairments. “We pen in 30bps in credit costs in 4QFY2024. In its 3QFY2024 earnings briefing, UOB had mentioned $2.5 billion in excess capital that may be available for a share buyback programme or special dividends, implying $1.50 in DPS.”
As at 11am, shares in DBS are trading 39 cents lower, or 0.89% down, at $43.51; while shares in OCBC are trading 3 cents higher, or 0.18% up, at $16.95; and shares in UOB are trading 33 cents lower, or 0.9% down, at $36.64.
