Waiting on rate tailwinds to kick in
? NIMs have inflected as S$ rates price in expedited Fed rate hikes. We factor
in 7 Fed hikes in FY22F and expect c.31-47bp NIM expansion in FY22-24F.
? Credit costs stayed benign with banks reporting resilient portfolios. Mgmt.
overlays should limit earnings downside should credit cost outlook turn.
? We upgrade DBS’s FY22-24F earnings by the most (c.5-12%), followed by
UOB (c.2-6%) and OCBC (c.3-5%).
? Reiterate Overweight. NIM expansion is a tailwind, while robust CET1
supports dividend visibility. We prefer OCBC for its attractive risk-reward.
NIMs have inflected, but non-II outlook will depend on sentiment
Singapore banks recorded a relatively decent showing in 1Q22 despite market volatility,
partly thanks to an inflection in NIMs (+2-3bp qoq) as SGD rates started pricing in expedited
Fed rate hikes to come, while keeping credit costs contained as macroeconomic headwinds
(rising inflation, surging commodity prices, supply chain disruptions) were moderated by an
improving economic outlook across ASEAN. Other key income drivers of wealth and
treasury income will also be dependent on market conditions in coming quarters,
particularly amid the risk-off sentiment – adding a swing factor to earnings going forward.
The banks differed on their loan growth outlooks, with DBS expecting a slowdown in 2H22
while OCBC and UOB estimate progressive credit demand recovery in FY22.
Rising interest rates a key tailwind for the sector
Rising interest rates remain a key tailwind for the sector, especially with market
expectations rising to c.7 Fed rate hikes in FY22F (vs.4-5 earlier this year). Although a c.6
month time lag is to be expected for these hikes to be translated into NIMs (time taken to
transmit into SGD rates, and for loans to be repriced), the expedited rate hike timeline
brings forward a larger portion of the NII rise into FY22-23F (vs. FY23-24F previously). As
we factor in 7 Fed hikes into our assumptions, we now expect c.31-47bp NIM expansion
for banks over FY22-24F. While rate hikes bode well for margins, we highlight that the
scenario of higher borrowing costs amid stagnant economic growth may soften investment
appetite and therefore overall fee income. Downside risks to our call include fewer-thanexpected Fed rate hikes or fierce funding competition. Deposit competition remains at bay
for the moment, which we believe is due to ample liquidity conditions in the system. The
banks have not observed significant outflows from fixed deposits into CASA yet.
Management overlays offset risks of potentially higher credit costs
As a whole, the banks expressed that there were no imminent asset quality pressures on
the horizon, whether from China or Russia-Ukraine exposures, and retained their individual
credit cost guidance for FY22F (DBS: up to S$100m, UOB & OCBC: c.20-25bp).
Nonetheless, the banks echoed each other’s sentiments of keeping watch over any change
in macro headwinds. Although risks of negative credit cost guidance revisions remain, large
management overlay buffers reduce the likelihood of significant earnings downgrades.
We prefer OCBC for its more attractive risk-reward profile
We keep Add ratings on all banks. We raise DBS TP to S$40.20 (from S$39.90) and UOBs
TP to S$35.60 (from S$35.40) as we incorporate Fed hikes but tone down treasury/wealth
income. OCBC’s S$14.20 TP is unchanged as the earnings rise from stronger NIMs and
treasury income is offset by softer wealth. The banks are well-positioned to sustain its
dividend policies in FY22F (we expect DBS: S$1.44, OCBC: S$0.60, UOB: S$1.20) given
that management overlay buffers stayed intact (DBS: c.S$1.5bn, OCBC: c.S$400m,
UOB:S$1.2bn) as CET1 ratios held steady at c.13.1-15.2% in 1Q22. With DBS and UOB
having entered agreements to acquire Citi’s retail banking franchise in the region, we think
that OCBC’s capital management plans remain an overhang on the stock given its robust
c.15% CET1 position. That said, OCBC remains our top pick for the sector given its more
attractive risk-reward profile. The bank trades at a c.17% discount (1.16x FY22F P/BV) to
its peak valuation of 1.5x P/BV during the previous rate hike cycle.