UOB Kay Hian Group Research analyst Jonathan Koh is remaining positive on the Singapore banking sector ahead of the banks’ results release for the 1QFY2022 ended March on April 29.
On April 19, Koh kept his “overweight” call on the sector even though he expects to see a reversal in net interest margin (NIM) expansions and weak wealth management fees albeit with stable asset quality during the quarter.
As the US Federal Reserve (US Fed) is expected to raise the Fed Funds Rate by 50 basis points (bps) at the next Federal Open Market Committee (FOMC) meeting on May 3 to 4, the analyst expects the banks’ NIM expansion to be more pronounced starting 3QFY2022.
Moreover, as the Russia-Ukraine crisis progresses, the analyst sees that it is possible for the conflict to degenerate into a protracted stalemate as Russians deploy siege tactics in the new battleground of Eastern Ukraine. The crisis leads to higher inflation levels, which also keeps bond yields higher for a longer period of time.
At the same time, the US labour market has demonstrated more resilience in recent times, with the US economy adding 431,000 jobs in March as hotels, restaurants, retailers and manufacturers hired more workers. The addition of new jobs brought the unemployment rate to 3.6% from 3.8% previously, closer to the country’s pre-pandemic levels.
The way Koh sees it, the resilient labour market supports growth in domestic consumption and will help the economy to weather the series of interest rate hikes and generate sustained recovery.
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The US yield curve is also no longer inverted, with the 10-year to two-year term premium in negative territory for only two days in early-April. It has since recovered to positive territory for the past two weeks and currently at 36 bps.
Within the sector, Koh has kept “buy” on DBS Group Holdings with a target price of $37.55.
For the 1QFY2022, the analyst is forecasting DBS to achieve net profit of $1.7 billion for the 1QFY2022, down 15% y-o-y but up 22% q-o-q.
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The lower y-o-y figure is partly due to the high base in 1QFY2021, as the bank reported record wealth management fees of $519 million and a significant write-back in general provisions of $190 million at the time.
During the quarter, Koh expects DBS to clock loan growth of 1.5% q-o-q and 7.2% y-o-y in 1QFY2022, with NIM edging marginally higher by 1 bp q-o-q to 1.44%.
“[The] three-month compounded Singapore Overnight Rate Average (SORA) has edged higher by 8 bps q-o-q to 0.27% in 1QFY2022 in response to the first hike of 25 bps for the Fed Funds Rate in mid-March,” he points out.
In addition, DBS is expected to see other non-interest income to decline 22% y-o-y in 1QFY2022 due to a high base. In the same period last year, DBS achieved a doubling of net trading income and sizeable gains from investment securities.
Koh also foresees DBS’s operating expenses to increase 4.5% y-o-y with cost-to-income ratio at 45.4%.
The bank’s asset quality is expected to stay benign, with its non-performing loan (NPL) ratio remaining stable at 1.3%. “We expect credit cost to remain muted at 5 bps in 1QFY2022 as compared to 3 bps in 4QFY2021 due to a smaller write-back in general provisions of $30 million in 1QFY2022 as compared to $34 million in 4QFY2021,” says the analyst.
In light of the effects from the Russia-Ukraine crisis, contribution from wealth management dropped 24% y-o-y due to a high base last year. This is a result of the risk appetite of high net worth clients dampening in March due to the war. “We expect healthy growth from cards, transaction services and loans-related fees,” Koh says.
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The analyst expects DBS to maintain its quarterly dividend at 36 cents for 1QFY2022.
Koh also has kept a “buy” rating on OCBC with a target price of $15.05.
“We forecast net profit of $1.1 billion for 1QFY2022, a rebound of 14% q-o-q but down 26% y-o-y,” says Koh. “1QFY2021 was a high base due to robust wealth management fees, insurance income and net trading income, coupled with lower provisions.”
The analyst also expects loan growth of 7.9% y-o-y and 1.0% q-o-q in 1QFY2022, driven mainly by network customers expanding overseas to acquire logistics, data centre and student accommodation properties and sustainable finance. “We expect NIM to edge marginally higher by 1bp q-o-q to 1.53%,” he adds.
Due to the Russia-Ukraine crisis, the analyst expects a decline of 14% with regards to risk appetite amongst investors, thereby affecting contribution from wealth management.
“We also expect contribution from insurance to decline 61% y-o-y, where insurance income tripled y-o-y to $469 million in 1QFY2021,” says Koh.
The analyst also forecasts net trading income to be muted at $100 million due to mark-to-market losses from Great Eastern.
Koh notes that OCBC has set aside management overlay of more than $400 million, which is above the amount of general provisions required by its macroeconomic variable (MEV) model. As such, asset quality is expected to be stable, as well as credit costs of 23bp in 1QFY2022.
Shares in DBS and OCBC closed at $33.64 and $12.11 respectively on Apr 22.
