3Q21F: Holding steady

  • We expect banks earnings to stay stable till U.S. Fed rate hikes begin. ECL to reflect lower global GDP growth could throw a spanner in the works.
  • Watch out for: DBS – writebacks on management overlays and higher DPS, OCBC – Chinese property exposure, UOB – stability of ASEAN portfolio.
  • Reiterate Neutral. We think UOB will outperform peers as it benefits from income stability over the past few quarters, and as a relative laggard play.

We expect UOB to lead peers in terms of growth and NIM stability

We expect 3Q21F to be a marked quarter of stabilising operating trends across Singapore banks, coming off an extended period of significant NIM compression, a build-up of management overlays on impairment provisions, and exceptional treasury income. As a sector, loan growth momentum likely held steady on the back of broad-based corporate loan growth, primarily in mature markets – we forecast c.1.6-2.5% qoq loan growth in 3Q21F. With funding costs-savings largely exhausted by now, we think NIMs may continue to be pressured by lower benchmark rates. On this front, we expect UOB to lead NII growth amongst peers given its relatively stronger loan volumes.

DBS could continue its streak of lowest credit cost in sector

We understand that the underlying portfolio credit quality across Singapore banks has normalised, with NPL accretion not concentrated in any one sector. In particular, UOB previously highlighted its consumer/SME portfolios in Malaysia and Thailand as key pressure points due to an uptick in applications for relief assistance and ongoing restructuring – loans in Malaysia are largely secured, and the Bank of Thailand is working with Thai banks to manage the restructuring processes. Meanwhile, OCBC is keeping watch on its corporate book in Malaysia and Indonesia; we think most of its credit costs will stem from these portfolios. Beyond these, we highlight the likelihood of model-driven expected credit loss (ECL) for heightened risks relating to China property and power sectors, and lower global GDP growth, as forecasted by International Monetary Fund (IMF) in 2021. Notwithstanding writebacks of management overlays to smoothen the impairment volatility, we think DBS could be the best performer in terms of 3Q21F credit cost, at c.13bp.

We expect a normalisation in insurance income to lift OCBC’s non-II

We see scope for sequential improvement in non-interest income (non-II), driven by broad-based fee income as business volumes increase, sustained wealth management fees, and relatively strong treasury income levels amid sustained market volatility. On balance, we think OCBC will show the largest rise in non-II as its insurance income recovers. We also expect an uptick in opex on the back of higher staff costs (e.g. delayed salary adjustment due to uncertain operating conditions) in line with revenue growth. Notably, DBS has announced recruitment drives for tech roles; we believe this is in anticipation of digital banks coming onstream in Singapore in 2022F.

UOB as our top pick; valuation more attractive at 1.05x FY22F P/BV

Apart from its dependable earnings stream over the past few quarters, UOB’s 1.05x FY22F P/BV valuation is more attractive vs. DBS’s 1.4x and OCBC’s 1.1x. Maintain sector Neutral. Key downside risk: outsized credit quality deterioration from China’s property segment fallout.