Benign asset quality to hold up in Q3

  • Benign asset quality will likely hold up in Singapore banks’ upcoming 3Q21 results; provisions could come in below banks’ guidance numbers for FY21F should recovery continue
  • Net interest margins (NIM) largely flattish q-o-q
  • Expenses should continue y-o-y uptick trend
  • Maintain BUY on OCBC and UOB; Singapore banks continue to be proxies to economic recovery

Benign asset quality will likely hold up in Singapore banks’ upcoming 3Q21 results; provisions could come in below banks’ guidance numbers for FY21F should recovery continue. During 2Q21, DBS/OCBC/UOB booked credit costs of 7bps/30bps/20bps. Benign asset quality will likely hold up in 3Q21, as we look towards low general provisions amidst some credit upgrades as banks continue to put through specific provisions for identified weaker credits. We believe regional exposure risks remain manageable given the banks’ strong buffers set aside in general provisions and provisions could come in below banks’ respective guidance numbers for FY21F should recovery continue.

NIM largely flattish q-o-q.
 DBS/OCBC/UOB saw -4bps/+2bps/ -1bps q-o-q NIM movements in 2Q21. DBS saw a -4bps q-o-q NIM movement as it continued to deploy surplus deposits at lower yields amidst lower interest rates. We believe 3Q21’s NIM trends are largely flattish q-o-q as Singapore banks continue to look out for ways to optimise cost of funding amidst lower benchmark interest rates. DBS has previously guided for a further drag of 2 to 3bps in 2H21 from 2Q21’s NIM of 1.45%.

Expenses should continue y-o-y uptick trend. 
We expect to see higher staff costs y-o-y and q-o-q as banks start to incur staff increments and higher variable costs amidst better business momentum as they continue to exercise cost discipline.

Maintain BUY on OCBC and UOB; Singapore banks continue to be proxies to economic recovery.
 We continue to maintain our BUY calls on OCBC and UOB, as we continue to favour Singapore banks across ASEAN banks due to their high earnings visibility and certainty of firm earnings and ROE recovery beyond FY21F, supported by potential writeback of provisions and potential return of excess capital in FY22F. Singapore banks are also seen as Fed hike beneficiaries as markets begin to price in Fed hikes in 2H22.