DBS Group Research analyst Lim Rui Wen is overall positive on Singapore banks, with ‘buy’ ratings as they look set to “benefit strongly” from the Fed rate hike cycle.
Lim has kept her “buy” calls for both Oversea-Chinese Banking Corporation (OCBC) and United Overseas Bank (UOB).
In her report dated July 22, Lim observes that the banks’ net interest income (NII) will bolster 2QFY2022 earnings as net interest margins (NIM) continue to expand. Banks’ management have guided for positive net interest income contributions on the back of higher interest rates.
During the 1QFY2022 ended March, DBS, OCBC and UOB saw improvements of 3 basis points (bps), 3 bps and 2 bps q-o-q respectively as loans started to be repriced.
“With the average three-month Singapore Interbank Offered Rate (SIBOR) increasing meaningfully by 70 bps/71 bps during the 2QFY2022, we expect NIMs to expand by [around] 5 bps - 9 bps, stronger than [the] banks’ guidance,” says Lim.
Meanwhile, wealth management income is likely to be soft during the quarter due to weak market sentiment says Lim, registering double-digit y-o-y decline. “This should be offset by stronger performances from cards among others,” the analyst writes. “We expect pure trading income to face headwinds, offset by strong customer-flow related income from higher activities.”
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At the same time, ongoing macroeconomic uncertainty raises concerns over asset quality. “However, we expect asset quality to remain benign, coupled with buffers from ample provisions that Singapore banks have built up through the course of the pandemic,” says Lim.
“We expect credit costs to continue trending at healthy levels in the FY2022. Given the ongoing macroeconomic uncertainties, Singapore banks’ management may be less inclined to write-back excess general provisions into FY2022,” she adds.
To be sure, DBS has built up some $1.5 billion of general provisions, which is $200 million above the Monetary Authority of Singapore’s (MAS) requirements. UOB, on the other hand, has over $1 billion of general provisions, the analyst notes.
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Ahead of the banks’ results for the 2QFY2022 and 1HFY2022, Lim says that all three banks are likely to see “good contributions” from the expansion of NIMs in the 2QFY2022. This, however, will be offset by weaker contributions from non-interest income and higher operating expenses.
While investors remain concerned over an overly hawkish Fed and recession risks, economists from DBS Group Research believe that inflation is likely to slow ahead.
The Fed is also expected to be “done” with tightening this year, says Lim.
She adds: “We believe valuations will continue to draw support from good provisions’ buffer built up during the pandemic, as well as approximately 4% - 5% dividend yields.”
However, the analyst expects mixed performance for trading and other income, on the back of market volatility, partially offset by stronger customer flows and hedging activities.
“Given that UOB’s trading and investment income in 1QFY2022 saw a sizeable impact from hedges as interest rates rose – management has guided that the impact is one-off and that quarterly trading and investment income should normalise towards $150 million - $200 million,” says Lim.
“We believe [OCBC’s insurance arm] Great Eastern may continue to see headwinds from non-operating profit as fixed income and equity market conditions continue to be challenging during the quarter,” she adds.
As at 12.13pm, shares in OCBC and UOB are trading at $11.53 and $27.58 respectively.
