UOB Kay Hian analyst Jonathan Koh is keeping his “overweight” recommendation on the Singapore banking sector as rising interest rates are expected to lift the net interest margins (NIMs) of all three banks DBS Group Holdings (DBS), United Overseas Bank (UOB) and Oversea-Chinese Banking Corporation (OCBC).
Koh’s report on July 21 comes ahead of the banks’ results for the 2QFY2022.
UOB is the earliest to release its results on July 29, while OCBC will release its results on Aug 3. DBS will round up the trio by releasing its results on Aug 4.
Overall, Koh expects the banks to report higher NIMs for the quarter, with DBS estimated to report a NIM of 1.53%, up 7 basis points (bps) q-o-q. OCBC is expected to report a NIM of 1.59%, up 4 bps q-o-q.
The analyst adds that he sees weakness in wealth management fees due to the full-quarter impact from the Russo-Ukrainian war, which affected market sentiment and increased high net worth clients’ risk aversion.
DBS’s wealth management income is estimated to drop 10% y-o-y, although its fees from transaction services are expected to be flat.
“Contribution from cards, the lone bright spot, [is slated to] increase 18% y-o-y due to resumption of business and leisure travel,” says Koh.
Meanwhile, the analyst expects OCBC’s wealth management to drop by 17% y-o-y in the 2QFY2022, while fee income is expected to drop by 11% y-o-y.
“Loans & trade-related fees are expected to be flat. Contributions from insurance [are expected to] decline 22% y-o-y due to mark-to-market losses from Great Eastern,” he writes.
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“Equity markets in Singapore and Malaysia have declined 9% in 2QFY2022. Bond markets were in the doldrums with 10-year government bond yield rising 66 bps to 2.98% in Singapore and 45 bps to 4.30% in Malaysia. We also expect net trading income to be muted at $120 million [for OCBC],” he adds.
For DBS, Koh is estimating that the bank’s non-interest income will decline by 29% y-o-y in 2QFY2022 due to the high base in the year before.
“We expect operating expenses to increase 5.8% y-o-y and cost-to-income ratio at 44.9%,” he says.
The bank’s asset quality is expected to remain benign with its non-performing loan (NPL) ratio stable at 1.3%.
“DBS has ample management overlay for general provisions, which were set aside previously due to the Covid-19 pandemic,” he writes. “We do not expect any write-back in general provisions in 2QFY2022 due to the uncertain economic outlook. We expect credit cost to remain low at 15 bps in 2QFY2022 before normalising higher in 2HFY2022”.
With OCBC, the analyst expects the bank to report loan growth of 6.5% y-o-y and 0.5% q-o-q in the 2QFY2022, driven mainly by network customers expanding overseas to acquire logistics, data centre and student accommodation properties and sustainable finance.
He also expects the bank’s asset quality to be stable.
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“OCBC has set aside management overlay of more than $400 million, which is above the amount of general provisions required by its macro-economic variable (MEV) model. We expect higher credit costs of 24 bps in 2QFY2022 (1QFY2022: 6 bps),” he writes.
Exposures to mainland Chinese residential mortgages
On the overall banking sector, Koh notes that the three banks do not have exposure to residential mortgages in mainland China.
“Singapore banks predominantly service the offshore needs when Chinese companies expand overseas through trade and investments. The trade finance and loan facilities provided are usually denominated in the US Dollar and booked offshore in Singapore and Hong Kong. Banks also support existing network customers within Asean when they expand into China,” he says.
“Their involvement in domestic business activities of domestic companies is small,” he adds.
Earnings estimates for the 2QFY2022
For the 2QFY2022, Koh is estimating DBS to report a net profit of $1.61 billion, down 5% y-o-y and 10% q-o-q. He has also estimated OCBC to report a net profit of $1.13 billion for the same period, down 2% y-o-y and 16% q-o-q.
Koh has kept his “buy” call on DBS with a target price of $39.50, noting that the bank’s share price has corrected by 17% from its recent peak.
He has also kept “buy” on OCBC with a target price of $14.75, noting that the bank’s share price corrected by 14% from its recent peak.
Shares in DBS and OCBC closed $30.67 and $11.37 respectively on July 21.
