Undoubtedly, the price performance and valuations of our local banks have been somewhat burdened by geopolitical tensions, war, famine and inflation. Rising interest rates may be negative for the general population, and for wealth management and equities in general, but for the local banks they are a definite plus. Hence, banks’ 2Q2022 results could allay some concerns as the market awaits further guidance.
It’s no surprise then that CGS-CIMB, in a recent update, is expecting DBS Group Holdings 2Q2022 results — to be announced on Aug 4 — to be affected by softer wealth management income, lower investment gains as interest rates rise, and upwards normalisation of credit costs.
On the other hand, net interest margin (NIM) expansion is likely to offset much of the weakness. DBS’s management has articulated that a 100 basis-point (bps) rise in interest rates over a 12-month period would provide around $1.8 billion to $2 billion more in net interest income.
“We expect DBS to record net profit of around $1.73 billion for 2Q2022 (–4% q-o-q, +1% y-o-y). We expect 1.5% loan growth in 2Q2022, mainly driven by corporate demand. On NIM, we project a larger 10bp q-o-q expansion to 1.56% in 2Q2022F and anticipate the rise to be more pronounced in 3Q2022, given the lagged passthrough of the 50bp to 75bp Fed rate hikes in May–June 2022, which may cushion the risks of higher impairments to come, if any,” CGS-CIMB’s report states. It is well known that DBS benefits from higher interest rates given its plentiful low-cost current and savings account or CASA (around 75% of total deposits). The unknown is likely to be the impact of current challenges of recession, inflation, and geopolitical tensions on credit costs.
CGS-CIMB is projecting credit costs of 15 bps for this year and next. As a result, it is forecasting a 33% rise in net profit for this year to $7.92 billion, and 14% rise in net profits for next year to $9.78 billion. If so, these are new highs.
UOB Kay Hian is expecting Oversea-Chinese Banking Corp’s NIMs to expand by 4bps q-o-q, but anticipates a drop in net profit to $1.14 billion in 2Q2022, down 16% q-o-q and 2% y-o-y, due to headwinds in wealth management. “We expect fee income to drop 11% y-o-y in 2Q22. Contribution from wealth management is expected to decline 17% y-o-y as investors’ risk appetite was affected by the Russia-Ukraine war,” UOB Kay Hian says.
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For United Overseas Bank (UOB), CGS-CIMB is forecasting a net profit of $1.07 billion in 2Q2022, up 19% q-o-q and 6% y-o-y. UOB was conservative on releasing excess general provisioning in FY2021, and it is likely to be as conservative this year. UOB’s stance could be that it is unlikely to significantly build up additional ECL 1 and 2 (expected credit loss stage 1 and 2 which are equivalent to general provisioning) largely because the management overlays continue to be very strong. But it is also the stance of the bank not to release ECL as evidenced in FY2021.
CGS-CIMB expects UOB to post a 9bps q-o-q expansion in NIMs to 1.67% in 2Q2022, with further rises in 3Q2022. “We understand that 75%–80% of UOB’s loan portfolio is on floating rates,” CGS-CIMB says. That implies a lag in the flow-through of higher rates on the loan book.
Technically, both DBS and UOB staged rebounds after short-term positive divergences appeared between price and short-term RSI.
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UOB rebounded to $27.37, below its 50-day moving average of $27.67. If prices rise above this level, the stock could gain strength. Prices broke below a top formation at around $28. Support has been established at $26 for the time being, although a target of $24 and lower was indicated following a breach of $28.
DBS’s share price rose above its 50-day moving average at $30.53 on July 19, but retreated subsequently. It is likely that DBS attempts to move above this level again. If successful, it would be able to negate the break below the double top which took place at $31.10 or so. For now though, the more volatile outlook is intact but immediate support is raised to $29.47 (from $27).
