UOB Kay Hian analyst Jonathan Koh is keeping his “overweight” call on the Singapore banking sector, as he sees all three banks as being the prime beneficiaries of higher interest rates.
Ahead of the banks’ results for the 4QFY2021 and FY2021, Koh predicts a lull in all three banks’ results, as is typically seen during the quarter.
DBS Group Holdings is slated to release its results on Feb 14, while UOB and OCBC are scheduled to release their results on Feb 16 and Feb 23 respectively.
Amid the seasonal lull, the banks look to be on track to achieve high single-digit loan growth with stable net interest margin (NIM), says Koh.
Non-interest income for all three banks is also expected to be seasonally softer.
However, Koh expects “pristine asset quality” from all three banks supported by the easing of the Covid-19 restrictions.
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In his report dated Feb 7, Koh estimates DBS to net profit of $1.49 billion for the 4QFY2021, up 47% y-o-y, but down 12% on a quarter-on-quarter (q-o-q) basis.
“We expect DBS to clock loan growth of 1.2% q-o-q and 10.1% y-o-y in 4QFY2021 with broad-based expansion from nontrade corporate and consumer loans. NIM is stable at 1.43% as interest rates remain near-zero (three-month compounded SORA edged marginally higher by 6 basis points (bp) q-o-q to 0.19% in 4QFY2021),” he writes.
Contribution from cards in DBS are also expected to grow 8% y-o-y due to the resumption of cross-border travel through the vaccinated travel lanes (VTLs).
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Net trading income is expected to be “seasonally lower” at $310 million. Gains from investment securities are also likely to be “muted” at $100 million during the 4QFY2021.
To this end, he expects DBS to maintain its quarterly dividend at 33 cents.
Koh has kept “buy” on DBS with a target price of $40.28.
With OCBC, the analyst has estimated that the bank will report net profit of $1.12 billion for the 4QFY2021, flat y-o-y, down 9% q-o-q.
The bank is expected to see loan growth to pick up to high single-digit expansion of 9.1% y-o-y and 2.2% q-o-q in the 4QFY2021, mainly driven by its network customers expanding overseas.
NIM is expected to be stable at 1.53%.
Fees for OCBC are expected to grow 8.7% y-o-y in the 4QFY2021 but ease 1.2% q-o-q. Its wealth management fees are expected to fall 6% q-o-q as well on liquidity being withdrawn due to the quantitative easing taper.
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OCBC’s contribution from its insurance arm is likely to increase by 14.8% y-o-y on the low base effect from the 4QFY2020.
“We expect net trading income to be muted at $175 million due to mark-to-market losses from Great Eastern in 4QFY2021,” writes Koh.
“We expect [OCBC’s] asset quality to be stable. 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 stable credit costs of 24 bp in 4Q21 (3Q21: 23bp),” he adds.
That said, Koh warns investors to “be on guard” against faster and steeper rate hikes.
The US Fed is set to lift interest rates during the next Federal Open Market Committee (FOMC) meeting on March 15 to 16 on the back of core personal consumption expenditures (PCE) inflation hitting a 40-year high of 4.9% in December 2021.
“Inflation has become more persistent and broad-based. The latest job report with non-farm payroll adding 467,000 jobs and unemployment rate at 4.0% in January signal that the US economy could already be in full employment,” he writes.
“Fed Chairman Jerome Powell has not ruled out raising interest rates at every successive FOMC meetings this year. He has also not ruled out steeper rate hikes of 50bp. On the contrary, he emphasised that the economy is stronger and inflation much higher now compared with the last rate hike cycle in 2015-2018. He also feels that there is quite a bit of room to raise interest rates without affecting the job market,” he notes.
As at 3.28pm, shares in DBS and OCBC are trading at $36.31 and $12.88 respectively, or an FY2021 P/B of 1.58 times and 1.06 times.
Photo: File photo
