3Q21 Results Preview: Resilient Earnings; Stable Asset Quality
We expect banks to report resilient earnings. We see a pick-up in loan growth partially offset by NIM compression. With asset quality stabilising, we expect DBS to benefit from write-back in general provisions and OCBC to see moderation in credit
costs. We forecast DBS and OCBC to achieve net profit of S$1,622m (+25% yoy and -5% qoq) and S$1,163m (+13% yoy and flat qoq) respectively for 3Q21. BUY DBS (Target: S$35.80) and OCBC (Target: S$15.65). Maintain OVERWEIGHT.
• OCBC and UOB are scheduled to release their 3Q21 results on 3 Nov 21 (Wednesday), followed by DBS on 5 Nov 21 (Friday).
• DBS: pristine asset quality prevails. We forecast net profit of S$1,622m for 3Q21, up 25% yoy but down 5% qoq.
• Uptick in loan growth supported by healthy pipeline. We expect loans to expand 8.3% yoy and 1.4% qoq in 3Q21 with broad-based growth from non-trade corporate loans, residential mortgages and wealth management loans. We expect NIM to narrow
2bp qoq 1.43% due to near-zero interest rates (average 3-month compounded SORA receded 5bp qoq to 0.13%).
• Resilient fees. We expect total fees & commissions to grow 8% yoy but stay flat qoq in 3Q21, and wealth management fees to rebound 6% qoq to S$450m as high net worth clients reposition their portfolio to weather elevated inflation and higher interest rates. We expect contributions from loan-related, transaction services and cards to be flat qoq.
• We expect net trading income to moderate slightly by 5% qoq to S$400m in 3Q21.
• Asset quality has stabilised. NPL formation is benign and NPL ratio eased marginally by 1bp qoq to 1.50%. DBS has fortified its balance sheet with general provisions reserves of S$4.1b as of Jun 21, which exceeded MAS’ minimum requirement by S$0.8b.
We anticipate write-back in general provisions of S$80m in 3Q21 (1Q21: S$190m and 2Q21: S$85m), its third consecutive quarter of write-backs. We expect credit costs of 10bp in 3Q21 (1H21: 4.5bp).
• We expect DBS to maintain quarterly dividend at 33 S cents.
• OCBC: Tinge of weakness from insurance. We forecast net profit of S$1,163m for 3Q21, up 13% yoy but flat qoq.
• Gradual pick-up in loan growth. Loan growth was muted at 3.9% yoy and 1.6% qoq in 3Q21, driven mainly by network customers expanding overseas by acquiring logistics, data centre, healthcare and student accommodation properties and sustainable finance. We expect NIM to slip marginally by 1bp qoq 1.57%.
• Stable contributions from fee income. We expect total fees & commissions to recover by 14% yoy but stay flat qoq in 3Q21, and wealth management fees to rebound 4% qoq. We expect other sources of fee income to be relatively stable qoq.
• Weakness from insurance. We expect contribution from the insurance business to weaken 20% qoq due to potential mark-to-market losses from its bond portfolio. We expect net trading income to moderate slightly by 15% qoq to S$180m in 3Q21.