Maybank Securities Research analyst Thilan Wickramasinghe is staying “positive” on Singapore banks ahead of their 3QFY2022 ended September results. The banks’ results are slated to arrive from the end of October.
United Overseas Bank (UOB) is set to report its results on Oct 28, while DBS will announce its results on Nov 3 and Oversea-Chinese Banking Corporation (OCBC) the following day, on Nov 4.
Wickramsinghe is maintaining “buy” on all three banks, with target prices of $42.18 on DBS, $14.39 on OCBC and $32.28 on UOB. DBS is his top pick “given lower funding cost advantage, strong provisions and potential capital release”.
Margins are set to accelerate, adds Wickramasinghe, but investors should watch out for China risks. “We expect the net interest income (NII) tailwinds seen last quarter to intensify with accelerating net interest margin (NIM) expansion following aggressive Fed rate hikes. Non-interest income (NOII) is likely to remain muted, although wealth management has likely bottomed.”
According to Wickramsinghe, a critical risk to watch out for is deteriorating asset quality from North Asia, which could drive credit charge guidance higher. In contrast, asset quality in Singapore and Asean should be benign, he adds. “Overall, we expect earnings momentum for the sector to remain positive.”
Expect funding costs to rise
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In the 2QFY2022, the sector’s NIM expansion accelerated to 12 basis points (bps) q-o-q compared to just 2 bps in 1QFY2022.
With two 75 bps Fed hikes within 3QFY2022, plus another 75 bps in the tail end of June, Wickramsinghe expects NIM expansion momentum to accelerate. “Of course, higher interest rates are likely to tighten spreads as cost of funding increases.”
In 1HFY2022, 1%-4% of current accounts, savings accounts (CASA) shifted to fixed deposits. “Nevertheless, we expect asset yields to have significantly outpaced funding cost increases. Loans expanded 7.6% y-o-y for the sector in 1HFY2022. The pace of growth may likely moderate, especially in manufacturing, small- and medium-sized enterprises (SMEs), private banking related lending as macro conditions slow,” adds Wickramsinghe.
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Mortgages should continue to remain supported from drawdowns on past launches, he says. “While wealth management fees likely bottomed in 2QFY2022, we expect sequential growth to be muted amidst market volatility. Assets under management (AUM) growth should be positive given Singapore’s safe haven status. Credit cards could be a bright spot from re-opening.”
North Asia exposure
North Asia non-performing loans (NPLs) increased between 8% and 191% q-o-q in 2QFY2022. “While some of these were one-offs, continuing stress in the Chinese property sector and potential contagion impacts landing on balance sheets cannot be ignored,” says Wickramasinghe. “In addition, continued Covid lockdowns adds further risk of stress.”
Investors should watch potentially renewed guidance for higher credit charges, he adds. “At the same time, continued weakness in markets could result in downside surprises to trading and investment income. Wage inflation is likely to keep opex growth momentum positive, although at a slower pace than 2QFY2022 where seasonal adjustments take place. However, stronger NII growth should keep cost-to-income ratios in check.”
While Wickramsinghe does expect a positive dividend surprise in 2022, this is likely only in 4QFY2022 given large capital buffers.
As at 11.22am, shares in DBS are trading 64 cents higher, or 1.96% up, at $33.27; while shares in OCBC are trading 14 cents higher, or 1.21% up, at $11.73; and shares in UOB are trading 38 cents higher, or 1.45% up, at $26.53.
