1Q22 Roundup: Toning down expectations as geopolitical tension escalates
While there was only half a month of positive impact from the first rate hike, DBS,
OCBC and UOB saw meaningful NIM expansion of 3bp, 3bp and 2bp respectively in
1Q22. Economic growth could moderate in 2H22. OCBC is most resilient with the
highest CET-1 CAR of 15.2%, followed by 14% for DBS and 13.1% for UOB. DBS and
OCBC provide attractive 2023F dividend yield of 4.4% and 4.8% respectively.
Maintain OVERWEIGHT. BUY OCBC (Target: S$14.88) and DBS (Target: S$37.25).
WHAT’S NEW
• DBS Group Holdings’ (DBS) and Oversea-Chinese Banking Corp’s (OCBC) results
exceeded expectations, while United Overseas Bank (UOB) missed consensus’
estimates.
• Benefitting from upcycle in interest rates. US Fed fired the first salvo against elevated
and persistent inflation by hiking Fed Funds Rate by 25bp during the FOMC meeting on 15-
16 Mar 22. While there was only half a month of positive impact, DBS, OCBC and UOB have
already saw meaningful NIM expansion of 3bp, 3bp and 2bp respectively to 1.46%, 1.55%
and 1.58%. This is the first quarter of NIM expansion in three years.
• Loan growth remains fairly resilient. DBS, OCBC and UOB achieved high single-digit loan
growth of 7.6%, 8.4% and 9.1% yoy respectively, driven by the Singapore and overseas
markets, such as Greater China and developed markets in Australia, the UK and the US. Net
interest income has started to inch higher by 3.8%, 4.3% and 10.3% yoy respectively.
• High net worth clients’ risk appetite affected by Russia-Ukraine war. DBS, OCBC and
UOB’s wealth management fees declined by 21%, 20% and 27% yoy respectively. Other
sources of fee income were more resilient. Loans-related fees expanded 21% yoy at DBS,
8% yoy at OCBC and 8% yoy at UOB. Contributions from credit cards recovered 11% yoy for
DBS and 5% yoy for UOB due to the reopening of international borders and pick-up in travel.
• Resilient contribution from Great Eastern. OCBC generated income of S$330m from life
and general insurance (+10% qoq) due to mark-to-market gains from a decline in
insurance contract liabilities, utilising a higher discount rate to value these liabilities.
• UOB affected by one-off negative impact from structural hedges. UOB suffered one-off
negative impact from structural hedges for its additional tier-1 capital securities as interest
rates rose. It also recorded unrealised mark-to-market losses from its investments. In total,
non-customer-related trading and investment incurred losses of S$117m.
• OCBC’s asset quality more stabilised in 1Q22. OCBC’s new NPL formation has
normalised to S$296m in 1Q22, significantly lower than S$1,057m in 4Q21 (COVID-19
pandemic caused delays to syndicated project financing in Greater China). Its NPL
balance contracted 0.7% qoq and its NPL ratio improved 0.1ppt qoq to 1.4%. DBS is well
positioned with the highest loan loss coverage of 118%.
• Strong balance sheet provides resiliency to weather uncertain macro environment.
OCBC has the highest CET-1 CAR of 15.2%, followed by 14% for DBS and 13.1% for
UOB. DBS maintained quarterly dividend at 36 S cents for 1Q22.
ACTION
• Series of 50bp hikes in the making. Many Fed officials have voiced support for 50bp hikes
during upcoming FOMC meetings as well as frontloading interest rate hikes in 2022. Vice
Chair Lael Brainard has stressed that the Fed is prepared to take stronger action in raising
interest rates as controlling inflation is of paramount importance. Many FOMC participants
judged that it is appropriate to move monetary policy towards a neutral posture expeditiously,
which could entail raising the Fed Funds Rate to about 2.5% by end-22. This implies
successive hikes of 50bp during upcoming FOMC meetings on 3-4 May and 14-15 June.
• Benefitting from NIM expansion. For DBS, we expect NIM to improve to 1.50% in 2022
and expand 23bp to 1.73% in 2023. We forecast earnings growth of 7.4% in 2023 and 10.3%
in 2024. For OCBC, we expect NIM to improve to 1.58% in 2022 and expand 13bp to 1.71%
in 2023. We forecast earnings growth of 8.6% in 2023 and 6.5% in 2024.
• Economic growth could moderate in 2H22. The banks have cautioned against second
order impact from the Russia-Ukraine War through higher energy and commodity prices.
Some companies may not be able to push through increases in pricing, which will result in
margin compression.
• Brighter prospects for ASEAN countries. ASEAN countries benefit from easing of safe
distancing measures and resumption of air travel. In particular, Malaysia and Indonesia gain
from recovery in domestic consumption and higher energy and commodity prices. ASEAN
countries benefit from the ongoing disruption to the global supply chain. Many multinational
companies have adopted the China+1 strategy and have plans to set up alternative
production facilities within the ASEAN region.
• Maintain OVERWEIGHT. Our top pick for Singapore Banks is OCBC (BUY/Target:
S$14.88), followed by DBS (BUY/Target: S$37.25).
SECTOR CATALYSTS
• NIM expansion in 2H22 and 2023 driven by upcycle in interest rates.
• Strengthening of economic growth driven by easing of safe distancing measures and
reopening of international borders after Singapore has weathered the Omicron variant.
RISKS
• Escalation of geopolitical tensions and trade conflict between the US, China and Russia.