Trading could disappoint. Core-businesses delivering
DBS, OCBC and UOB are set to report their 1Q22 trading update on 29 April.
We think a critical downside risk could be weak trading income and markto-market losses on investment securities given the substantial macro-volatility during the quarter. This could heighten earnings disappointment
risks. On the other hand, we expect core-businesses to show resilience,
especially loan growth and improving margins. From a timing perspective,
a bulk of delivery could be skewed towards 2H22, as loan re-pricing gets
reflected and customer investments accelerate from regional re-opening.
We would consider 1Q results-related weakness as an opportunity to
accumulate. Top picks – DBS and UOB for their regional franchise, strong
balance sheet and dividend visibility.
Watch for disappointments in trading
JPMorgan (JPM US, USD127.30, NR) reported a major loss of USD524m in
1Q trading income from credit valuation adjustments and market
volatility. Over the past 5-years, trading contribution for Singapore banks
is ~8% of income (17% for OCBC if insurance is included). This may see
downside-surprise risks from similar reasons to JPM. Customer related
flows (estimated ~70% of trading) from increased hedging activities may
provide some offset. Additionally, mark-to-market losses on investment
securities is a further downside risk (2-3% of income).
Loans, NIMs improving. More momentum in 2H
Core-operations are likely to hold up, in our view. We expect timing delays
for loan growth to manifest in 1Q22. The Russia-Ukraine invasion and
global volatility could potentially affect corporate drawdown schedules.
Commodity-linked sectors could be the exception driven by higher working
capital needs. Nevertheless, we do not expect any material downgrades
to loan growth guidance (MIBG estimates +8.6% YoY 2022E) given the
underlying regional re-opening momentum and potential acceleration of
North-South supply chain shifts. While SIBOR was +29bps higher in 1Q,
expect re-pricing momentum to show up later in the year. Fed rate-hikes
remain a key tailwind for the sector.
Asset quality holding up. Expect higher GPs
As regional re-opening gathers pace and loan moratoriums fade, we expect
asset quality to remain well supported (2022E sector NPL 1.4%). However,
weakness in Europe and China plus higher inflation forecasts may drive
upgrades to GP as macro-factors are updated. The improved outlook for
oil & gas could result in some write-backs against provisions taken in the
2017-18 cycle. Separately, we do expect opex – particularly staff and IT –
to continue its upwards trajectory. Border re-openings could take some
pressure off staffing costs, especially in Singapore, but this is likely in the
latter part of the year, in our view.