Analysts expect local banks to report 'resilient earnings' for 3QFY2021, maintaining ‘overweight’ on the sector.
“Singapore GDP grew 6.5% yoy in 3QFY2021 powered by growth in the services sector. The recent tightening of safe distancing measures did not affect economic activities as Singapore is well adjusted to living with Covid-19 as an endemic and working from home. For Singapore banks, asset quality continues to improve and earnings stay resilient. The sector provides attractive average dividend yield of 4.1% for 2021 and 4.7% for 2022,” writes UOB Kay Hian Research analyst Jonathan Koh.
In an Oct 22 note, Koh recommends ‘buy’ on DBS and Oversea-Chinese Banking Corporation (OCBC), with target prices of $35.80 and $15.65 respectively.
OCBC and UOB are scheduled to release their 3QFY2021 results on Nov 3, followed by DBS on Nov 5.
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“We see a pick-up in loan growth partially offset by net interest margin (NIM) compression. With asset quality stabilising, we expect DBS to benefit from write-back in general provisions and OCBC to see moderation in credit costs,” writes Koh.
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For the quarter, Koh forecasts DBS to achieve net profit of $1,622 million, up 25% y-o-y and down 5% q-o-q; while and OCBC should post net profit of $1,163 million, up 13% y-o-y and flat q-o-q.
“For DBS, we expect loans to expand 8.3% y-o-y and 1.4% q-o-q in 3QFY2021 with broad-based growth from non-trade corporate loans, residential mortgages and wealth management loans,” writes Koh.
Koh expects DBS’ net interest margins (NIM) to narrow 2 bps q-o-q to 1.43% due to near-zero interest rates. "We expect total fees and commissions to grow 8% y-o-y but stay flat q-o-q in 3QFY2021, and wealth management fees to rebound 6% q-o-q to $450 million as high net worth clients reposition their portfolio to weather elevated inflation and higher interest rates. We expect contributions from loan-related, transaction services and cards to be flat q-o-q.”
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“We expect net trading income to moderate slightly by 5% q-o-q to $400 million in 3QFY2021. Asset quality has stabilised. Non-performing loan (NPL) formation is benign and NPL ratio eased marginally by 1 bp q-o-q to 1.50%,” notes Koh.
DBS has fortified its balance sheet with general provisions reserves of $4.1 billion as of June, which exceeded MAS' minimum requirement by $0.8 billion. “We anticipate write-back in general provisions of $80 million in 3QFY2021, its third consecutive quarter of write-backs,” writes Koh.
Koh notes a “tinge of weakness from insurance” for OCBC. “We expect contribution from the insurance business to weaken 20% q-o-q due to potential mark-to-market losses from its bond portfolio. We expect net trading income to moderate slightly by 15% q-o-q to $180 million in 3QFY2021”
Loan growth was muted at 3.9% y-o-y and 1.6% q-o-q in 3QFY2021, driven mainly by network customers expanding overseas by acquiring logistics, data centre, healthcare and student accommodation properties and sustainable finance. “We expect NIM to slip marginally by 1 bp q-o-q to 1.57%,” writes Koh.
OCBC’s total fees and commissions will recover by 14% y-o-y but stay flat q-o-q in 3Q21, and wealth management fees should rebound 4% q-o-q. “We expect other sources of fee income to be relatively stable q-o-q,” he adds.
“We expect asset quality to have stabilised. OCBC has set aside management overlay of more than $500 million, which is above the amount of general provisions required by its macro-economic variable (MEV) model. We expect slight easing of credit costs to 30 bps in 3Q2021 from 34 bps,” writes Koh.
Meanwhile, RHB Group Research analysts are recommending ‘buy’ on UOB and OCBC, with target prices $30.20 and $14.30 respectively.
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“Broadly, we expect similar key operating trends to those in 2QFY2021. Banks’ operations remained steady despite the re-introduction of containment measures in July-August. Absence of a positive surprise for a second consecutive quarter will likely see share prices drift sideways in the near term. Still, we see positive catalysts for 2022, [such as the] start of interest rate upcycle, provision writebacks, and rising dividend payouts,” writes RHB.
RHB thinks Singapore’s banks are not seeing any asset quality pressure. “They do not have exposure to China Evergrande Group, while the reintroduction of containment measures in Singapore and regional countries has not adversely impacted customers’ ability to meet their financial commitments.”
Impact from the recent loan moratorium and interest waiver in Malaysia is expected to be manageable, says RHB. “Banks are unlikely to require additional allowance given the substantial management overlays taken in 2020. We expect credit cost to fall back to normalised levels in 3QFY2021. That said, we believe banks will only write back pandemic-related provisions in FY2022F.”
“UOB is our top pick given its growing fee income base, healthy asset quality with strong provision buffers, and resumption of 50% dividend payout,” says RHB.
“OCBC’s FY2021F earnings are projected to improve 38% on robust wealth management and insurance income and lower provisions. Investors are somewhat disappointed by OCBC’s lack of firm indication of dividend payout despite its high common equity tier-1 ratio (CET-1) of 16.2%,” adds RHB.
“DBS is expected to post FY2021F earnings growth of 43% with return on equity (ROE) recovering to 11.9%. It remains a good proxy to Singapore’s economic recovery, aside from being a key beneficiary of the expected rise in US interest rates,” says RHB.
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On Oct 22, shares in DBS closed 15 cents higher, or 0.48% up, at $31.37; while shares in OCBC are trading 10 cents higher, or 0.84% up, at $12; and shares in UOB are trading 8 cents higher, or 0.3% up, at $26.88.
Photo: Bloomberg
