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.
See also: Credit costs likely peaked, asset quality stabilises, dividends to normalise for Asean banks
“We don’t expect the banks to release provision reserves in 2Q2021 as management are likely to remain conservative in light of the recent pick up in Covid-19 cases and tightened mobility restrictions regionally,” says UBS. The Swiss bank pointed out that DBS’s 1Q2021 writeback was ‘entirely model driven and was due to repayments and improvement in asset quality, while management overlay of $1.3 billion still remains intact’. UBS adds that it doesn’t see any signficant changes in MEV models from 1Q2021 to 2Q2021.
Dividends could be reinstated, UBS indicates. “We believe MAS will likely lift the dividend restrictions given the strong capital levels at the local banks, stabilising asset quality, and prudent and early provisioning in 2020.” At the recent Monetary Authority of Singapore’s Annual Report 2020/2021 Virtual Media Conference on June 30, 2021, MAS managing director Ravi Menon shared that "MAS’ concerns at the onset of the crisis that defaults among weaker corporates could strain banks’ profitability and capital positions have not materialised. MAS is conducting additional stress tests to assess whether it is necessary to extend the current dividend restrictions on local banks and finance companies."
In FY2021, UBS estimates that DBS is likely to return to a dividend of 33 cents per quarter, OCBC to a dividend of 48 cents for the full year, and UOB will resume its 50% payout ratio without a special dividend of around $1.10. This translate into a divdend yield of 4.3% for DBS, 4.2% for UOB, and 3.9% for OCBC.
