Improving operations offers entry opportunity
DBS and OCBC 1Q22 earnings were in-line with Street, while UOB was
below from weak trading income. The sector is in the early phase of
operational growth with rising NII supported by robust loans and improving
NIMs. As rates increase and regional re-opening gathers pace, we expect
momentum to accelerate – especially in to 2H22. Asset quality and tail
risks from geo-politics, inflation and uncertain macro need to be watched,
but strong capital levels and provisions provide offsets. Maintain Positive.
We upgrade OCBC to BUY on unchanged TP of SGD14.04. Preferred pick
DBS given low cost funding base supporting NIM upside from rising rates.
Non-interest income affected by high base
YoY non-interest income declined largely from a high base effect of 1Q21
fee income. Recall strong wealth management contributions from buoyant
market conditions then. Pervasive macro uncertainty could likely keep
wealth fees subdued in the near term, but operational fees from loans,
transactions as well as credit cards should see upside as regional
economies re-open, we believe. Trading income disappointed the most for
UOB from hedging impacts on their credit holdings as well as mark-tomarket losses on equities. Management expects a turnaround in
subsequent quarters, but we have lowered 2022-24E non-interest income
by 5-6%. For DBS and OCBC trading income held up better than expected.
Signs of operational resurgence
All three banks saw NII improving YoY and QoQ. Loan growth at 8-9% YoY is
robust, pointing to regional recovery. A slower North Asia remains an
overhang, but policy support for economic growth in China is an upside
risk. Similarly, re-opening of SE Asia and gathering pace of North-South
supply chain relocations should support loan growth going forward, in our
view. For the first time in four quarters, all three banks saw NIMs improving
QoQ. Rising rates should provide asset-repricing upside across the
portfolio, especially with 56-76% of deposits in CASA. Further, 20-25% of
loans are in USD – largely funded by USD CASA. This means Fed rate hikes
should directly flow through to improving spreads here.
Asset quality benign, but watch for headwinds
NPL ratios largely fell YoY, pointing to improving conditions and rising loan
growth. QoQ specific provisions fell for UOB and OCBC. General provisions
also saw declines, but not as much as previous quarters and with lesser
write-backs. These point to higher levels of caution given the potential for
second/third order impacts on portfolios from geo-politics, inflation,
commodity volatility and macro uncertainty. We expect the pace of writebacks to slow going forward, even while asset quality is improving. We
have raised DBS 2022-24E credit charges by 6-9bps to reflect lower writebacks. Nevertheless, for the sector, we forecast 2022E provision covers of
91-107%, giving significant buffer for uncertainty.