Expect high margins and low non-performing loans when Singapore’s banks report 4QFY2022 ended December results later this month, says Maybank Research analyst Thilan Wickramasinghe.
However, investors should also expect increasingly cautious guidance around credit costs and asset quality, he adds in a Jan 30 note.
DBS is set to report its 4QFY2022 results on Feb 13, before United Overseas Bank (UOB) makes its announcement on Feb 23 and Oversea-Chinese Banking Corporation does the same on Feb 24.
Wickramasinghe is maintaining “positive” on the banking sector here, with net interest margins (NIMs) set for further acceleration, riding on US Fed rate hike tailwinds. “Concurrently, we expect to see higher funding costs setting the stage for this momentum to taper in 2023.”
Non-interest income is unlikely to see a turnaround, he adds, as banks are squeezed between seasonally slow wealth management and slowing loan growth. “Wealth management is seasonally weaker in 4Q, while rising interest rates and volatile market conditions are unlikely to have driven an inflection. We expect credit cards to be a bright spot from increased travel from border re-openings. Trading income is a key uncertainty.”
Wickramsinghe believes asset quality should continue to remain robust, especially supported by China’s re-opening. “However, expect increasingly cautious guidance around credit costs and asset quality.”
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With common equity tier-1 (CET-1) levels and provisioning coverage levels high, investors could look to upside surprises from DBS and UOB for special dividend announcements, he notes.
Wickramasinghe is staying “buy” on all three banks here, with target prices of $42.69 for DBS, $33.77 for UOB and $14.70 for OCBC.
3QFY2022 comparison
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In 3QFY2022 ended September, banks’ NIMs saw a large 32 basis points (bps) q-o-q increase compared to a 12 bps q-o-q rise in 2QFY2022 ended June.
Cost of funding in 4QFY2022 is likely driven higher, notes Wickramasinghe, especially with an increase in promotional deposit building activities.
Low-cost current account, savings account (CASA) deposit ratios fell 5.3 percentage points (ppts) q-o-q in 3QFY2022 and Maybank expects further declines in 4QFY2022.
Nevertheless, two more Fed rate hikes during the quarter (75 bps in November, 50 bps in December, plus 75 bps at the tail end of September) are likely to boost asset yields at a far faster clip, giving additional support to NIM expansion, he adds.
According to Maybank, the three banks’ loan growth may see weakness as repayments increase, as corporates look to offset rising interest costs.
Expecting more cautious guidance
NPL ratios continued to fall in 3QFY2022 and credit costs remained benign despite weakening macro conditions. “We expect asset quality to be well-supported in 4QFY2022 and distinct sectoral stress is unlikely. While China’s abrupt re-opening is a tailwind for asset quality, higher interest rates, rising input costs and weaker global growth is likely to drive more cautious guidance for credit costs in 2023.”
In addition, tight labour conditions and re-opening demand driven opex have likely peaked, says Wickramasinghe. “We do not expect a quick tapering in 2023 as banks preserve capacity to respond to rising activity in North Asia.”
As at 11.08am, shares in DBS are trading 19 cents lower, or 0.53% down, at $35.60; while shares in UOB are trading 5 cents lower, or 0.17% down, at $29.70; and shares in OCBC are trading 4 cents lower, or 0.31% down, at $12.89.
