The local banks have rebounded significantly since their July 10–11 closing lows. DBS Group Holdings’ closing low was $30.67, Oversea-Chinese Banking Corp’s (OCBC) closing low this month was $12.05 and United Overseas Bank’s (UOB) was at $27.13.
Most likely, the US Federal Reserve is dictating the direction and positions that investors and traders are taking on the banks. The Fed in turn is being directed by US economic data including inflation data that is falling in both the US and UK. Notably, the narrative from Chinese economists is that their economy is not in a Japanification era, which refers to deflation setting in and the increasing likelihood of a non-inflationary global environment.
If inflation really has been tamed, or perhaps slayed, the local banks are likely to benefit. Falling inflation rates could stay the hand of the Fed in raising its Federal Funds Rate further from current levels. That would imply that credit costs for our local banks are likely to remain within the guidance their management has given. If so, no nasty shocks are likely to pounce during the corporate reporting season that is just getting underway.
In an update on July 20, UOB Kay Hian says: “We forecast that banks’ 2Q23 earnings will be powered by strong y-o-y growth in net interest income, robust net trading income and disciplined cost containment. Asset quality and credit costs remain benign. We forecast a net profit of $2,466 million for DBS (+31% y-o-y but –4% q-o-q) and $1,722 million for OCBC (+16% y-o-y but –8% q-o-q).”
According to Bloomberg estimates, DBS is forecast to record a net profit of $2.325 billion in 2Q2023, slightly below UOB Kay Hian’s forecast after reporting a net profit of $2.57 billion in 1Q2023. If DBS continues with this run rate for 2H2023, it may be able to top $10 billion for the full year.
Bloomberg’s poll of estimates by analysts forecasts OCBC to report a net profit of $1.79 billion in 2Q2023, slightly above UOB Kay Hian’s forecast. In 1Q2023, OCBC reported a net profit of $1.88 billion. OCBC is UOB Kay Hian’s top pick because the bank provides attractive dividend yields for 2023 and 2024 of 5.9% and 6.3% respectively.
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UOB Kay Hian does not have a forecast for UOB as it is an associated company. Bloomberg’s poll of analysts estimates UOB to report a net profit of $1.42 billion in 2Q2023 compared to its reported net profit of $1.58 billion in 1Q2023.
The three banks have different geographic footprints. DBS and OCBC have built up sizeable wealth management franchises. UOB is better known for its regional Asean franchise which has been boosted by its acquisition of Citigroup’s retail bank in Malaysia, Thailand, Vietnam and Indonesia.
China is particularly important for OCBC because its management held a briefing in Hong Kong earlier in July on its prospects in the Greater Bay Area (GBA) where it planned to make further investments. In 2014, OCBC acquired Wing Hang Bank for the equivalent of US$5 billion and has articulated a $3 billion incremental income uplift from its GBA franchise.
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However, among the clouds on the horizon are downward revisions for China’s GDP growth this year. Bank of America (BoA) has revised 2023 growth to 5.1% from above 6% earlier while growth in 2024 is expected to slow to 4.8% based on disappointing 2Q2023 data and a potential delay in policy response.
