CGS-CIMB Research analysts Andrea Choong and Lim Siew Khee have kept their “neutral” rating for Singapore banks in the lead up to 3QFY2021 ended September results announcements.
United Overseas Bank (UOB) and Oversea-Chinese Banking Corporation (OCBC) will be announcing their results on Nov 3, while DBS Bank will be announcing its results on Nov 5.
Overall, Choong and Lim expect the banks’ earnings to stay stable until the US Federal Reserve’s rate hikes begin. “We expect 3Q2021 to be a marked quarter of stabilising operating trends across Singapore banks, coming off an extended period of significant net interest margin compression, a build-up of management overlays on impairment provisions, and exceptional treasury income,” they remark in an Oct 18 research note.
See: Briefs: Fed taper could start 'soon', local banks have no direct exposure to Evergrande
They forecast UOB to hit record earnings of $1.03 billion for the 3QFY2021, up 3% q-o-q and up 55% y-o-y, driven by strong loan growth and stable net interest margins (NIMs).
They also forecast 3QFY2021 earnings of $1.64 billion for DBS, (down 4% q-o-q, up 26% y-o-y), and $1.19 billion for OCBC (up 2% qoq, up 15% you).
The analysts view loan growth momentum held steady during the third quarter, driven by broad-based corporate loan growth. They forecast q-o-q loan growth of 1.6-2.5% for 3Q2021.
Choong and Lim believe UOB will lead in terms of net interest income growth given its relatively stronger loan volumes.
They also highlight that the underlying portfolio credit quality across Singapore banks has normalised, with non-performing loans (NPLs) accretion not concentrated in any one sector.
Nonetheless, they also point out the likelihood of model-driven expected credit loss (ECL) reflecting heightened risks relating to China property and power sectors and lower global GDP growth.
“Notwithstanding writebacks of management overlays to smoothen the impairment volatility, we think DBS could be the best performer in terms of 3Q2021 credit cost, at circa 13 basis points,” they comment.
Choong and Lim see scope for sequential improvement in non-interest income, driven by broad-based fee income as business volumes increase, sustained wealth management fees, and relatively strong treasury income levels amid sustained market volatility.
“On balance, we think OCBC will show the largest rise in non-interest incomeI as its insurance income recovers,” they say.
UOB is the analysts’ top pick for the sector, underpinned by its “dependable earnings stream” as well as its more attractive valuation - UOB currently trades at 1.05 times its FY2022 book value, compared to DBS’ 1.4 times and OCBC’s 1.1 times.
For more stories about where the money flows, click here for our Capital section
As at 3.48pm, shares in UOB, DBS and OCBC are trading at $26.83, $31.19 and $11.96 respectively.
Photo: Bloomberg
