The Singapore research team at RHB Group Research has kept its “overweight” call on Singapore banks as it remains “more confident” about the sector’s outlook for FY2023.
Fee income will be a “key earnings driver” for the sector in FY2023 as a “healthy inflow” of net new money in the 4QFY2022 “has led to optimism the wealth management business will stage a recovery in FY2023”, says the team.
“There are early signs that investors are turning more positive, after being in a risk-off stance for most of 2022. Further recovery in intra-regional trade flows would also have a positive impact on fees from trade-related products. DBS Group Holdings D05 and United Overseas Bank (UOB) U11 are guiding for double-digit growth in fee income for FY2023,” the team writes.
In addition, the team is also anticipating the sector to see mid-single-digit loan growth in FY2023 following the banks’ loan contraction of 2.5% q-o-q in the 4QFY2022 amid concerns of a global economic slowdown.
The pick-up in loan demand comes as Asean economies are holding up better than expected and that the estimate of mid-single-digit loan growth is “within reach”.
The sector’s loan growth was a “muted” 1.9% y-o-y in the FY2022, the team notes.
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Further to its report, the team is expecting NIMs to peak in the 1HFY2023 before the catch-up in funding costs leads to lower margins in the second half of the year.
Singapore banks are guiding for another 20 to 35 basis point (bps) increase in NIMs in the FY2023 following the expansion of NIMs by 30 to 37 bps in the FY2022.
“This is based on the expectation that the Fed Funds Rate (FFR) will rise by 50 - 75bps to 5% - 5.25% in 2023,” the team writes.
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“It is also positive to note that deposit competition, which was very intense at end-2022, has started to abate. DBS and UOB expect NIM uplift of 34 bps – 35 bps in FY2023, while Oversea-Chinese Banking Corporation (OCBC) O39 sees a smaller increase of 20 bps,” it adds.
In the FY2023, the RHB team also believes that higher dividends are “in the offing” after all three banks upped their dividend payouts for the FY2022 and with their common equity tier 1 (CET1) ratios at “very comfortable levels”. The banks have also guided for a “healthy profit growth” in the FY2023, notes the team.
“Post 4QFY2022 results, our FY2023 – FY2024 sector net profit is raised marginally, by 1% - 2%,” says the team. “Our FY2023 core earnings are projected to rise 21% y-o-y on robust topline growth that would comfortably absorb low-teens cost growth and the moderate uptick in credit cost.”
It adds: “Sector return on equity (ROE) is projected to improve to 14.6%, from 12.1% in FY2022”.
Despite the positive outlook, the RHB team notes that it is also “watchful” on the banks’ asset quality with all three banks seeing a “sustained downtrend” in impaired loans as Singapore transitioned to Covid as an endemic in 2022.
“Sector non-performing loan (NPL) ratio eased to 1.28% in December 2022, below pre-pandemic levels of 1.5%-1.6% in FY2017 – FY2018. Although they are not seeing any material signs of weakness, banks believe the rapid interest rate hikes in 2HFY2022 could result in some upticks in NPLs. They have guided for a mild uptick in FY2023 credit costs, with robust loan loss coverage (LLC) providing buffers against potential spike in NPLs,” says the team.
“Non-performing asset (NPA) coverage stands at 114% for OCBC, 102% for DBS and 84% for UOB. We have factored in higher credit cost of 17 bps for FY2023, compared to 13 bps in FY2022,” it adds.
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In their view, a sharper-than-expected downturn in global economists and a prolonged period for elevated deposits are key downside risks. A significant deterioration in asset quality is also another risk, adds the team.
Among the three banks, DBS and OCBC Bank are the team’s top picks.
As at 3.49pm, shares in DBS, UOB and OCBC are trading at $32.81, $28.40 and $12.22.
