Credit cards look set to become a “bright spot” for Singapore banks’ fee-income expansion in FY2023, says Bloomberg Intelligence analyst Rena Kwok.
The analyst sees contributions from credit cards to the banks’ total fee income driven by a delayed recovery in tourism and business travel across the region, as well as consumption spending. To be sure, the recovery could even see growth momentum from credit cards sustaining till the end of the FY2023.
Among the three banks, UOB’s credit card contribution could see the biggest y-o-y growth in FY2023. The growth may also help the lender achieve its double-digit target for fee-income growth after the consolidation of Citigroup’s retail portfolio.
UOB has completed the acquisition of Malaysia, Thailand and Vietnam and is set to complete the acquisition of Citi’s retail portfolio in Indonesia by the end of 2023.
UOB’s fee income could also increase thanks to the bank’s digital initiative via the UOB TMRW app. The bank may also see a temporary boost in June applications thanks to a tie-up with Taylor Swift’s The Eras Tour in Singapore. UOB is the official bank and presale partner for Swift’s concert, which sold out in eight hours after they went on sale. The bank’s cardholders in Singapore, Thailand, Malaysia, Indonesia and Vietnam were given access to the presale two days ahead of the general public.
According to Bloomberg, UOB saw a 45% increase in its daily average credit card applications across these markets during the week Swift’s concert dates were announced.
Beyond paying for concert tickets, Kwok notes that the use of credit cards could also remain the preferred mode of payment in Singapore in the near-term despite growing competition from various digital payment channels.
This is attributable to credit cards’ maturity as a payment method in the country and supported by its strong payment infrastructure. Consumers’ strong preference for card payments over cash due to their value-added benefits as well as merchant acceptance are also factors for consumers preferring to pay using their credit cards.
For point-of-sale (POS) transactions in 2022, credit cards constituted 36% of transaction value, debit cards 21%, cash 19% and digital wallets 18%, Kwok highlights.
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In terms of unsecured retail loans, the impact of defaults on Singapore banks appears to be limited given these loans' meagre share of lenders' books, their broadly improving risk profile and the regulatory caps on rates.
“As Citi's retail loans have a healthy risk profile, they may not raise the risk of UOB's unsecured retail loans much,” says Kwok.
“With the consolidation of Citi's retail loans, the average probability of default (PD) of UOB's qualifying revolving retail exposure (QRRE) -- comprising revolving, unsecured, and uncommitted retail loans, based on its advanced internal rating-based model under Basel rules -- was the highest among peers in 4QFY2022 at 2.5% (and comparable to 4QFY2020). OCBC's unsecured retail loans, with about $6 billion in exposure at default, had the lowest PD of 1.1%,” she adds.
In a separate report, Kwok says that UOB’s capital cushion could outdo DBS’s as its profitability climbs.
“UOB's core capital buffers remain solid even without refinancing existing additional tier 1 [capital] (AT1s) and could outpace DBS's this year. This is thanks to a profitability boost from its acquisition of Citi's retail assets in key Asean markets,” she writes.
“High returns and low credit risks in UOB's credit-card portfolio is a bright spot for earnings this year,” she adds.
On the overall banking sector, Kwok believes all three lenders may sustain “healthy core capital” in FY2023 due to “modest asset growth, relatively benign credit losses and strong earnings momentum, partly offset by dividend payouts and manageable unrealized losses on securities holdings amid elevated interest rates”.
“Singapore banks' low dependence on AT1s to maintain their capital adequacy suggests they would remain well-capitalized if they chose not to refinance their existing AT1s outstanding. Based on 4QFY2022 figures, each Singapore bank would have more thanS$6 billion of excess Tier 1 capital above the minimum regulatory levels without refinancing the AT1s,” she adds.
As at 12.30pm, shares in DBS, OCBC and UOB are trading at $32.70, $12.68 and $28.38 respectively.
