In a report dated July 13, UBS reckons that the local banks are likely to shift their focus towards loan growth and maintaining their net interest margins (NIM). Although the banks guided for stable NIMs, a surprise rise in US inflation may cause bond yields and eventually US interest rates to move higher despite the US Federal Reserve maintaining no official rise in the Fed Funds Rate till 2023. That should be good news for NIMs as around half of banks’ earnings are from net interest income.
Elsewhere, credit costs - which were elevated in 2020 with banks setting aside more than enough in provisions- are likely to ease, and these declines are likely to lift net profit figures in 2Q2021. Already, in 1QFY2021, ECL (expected credit loss) 1 and 2 levels had fallen sharply for two of the local banks, while DBS Group Holdings had a writeback. ECL 1 and 2 are equivalent to general provisioning, and usually depend on macro-economic variable (MEV) models. During their 1QFY2021 results, the CFOs of both Oversea-Chinese Banking Corp and United Overseas Bank articulated that they are unlikely to write back hefty provisions made in FY2020.
