Singapore Banks: Rate hike beneficiaries
- Net interest income will bolster 2Q22 earnings as NIM continues to expand
- Headwinds from non-interest income
- Asset quality continues to be benign
- Remain positive on Singapore Banks; maintain BUY on UOB and OCBC
Net interest income will bolster 2Q22 earnings as NIM continues to expand. Banks’ management have guided for positive net interest income contributions on the back of higher interest rates. During 1Q22, DBS/OCBC/UOB saw 3bps/3bps/2bps q-o-q improvement as loans started to be repriced. With average 3MSIBOR/ SGD SORA increasing meaningfully by 70bps/71bps during 2Q22, we expect NIMs to expand by c.5-9bps, stronger than banks’ guidance.
Headwinds in non-interest income. Wealth management income is likely to be soft during the quarter due to weak market sentiment, registering double-digit y-o-y decline. This should be offset by stronger performances from cards among others. We expect pure trading income to face headwinds, offset by strong customer-flow related income from higher activities.
Asset quality continues to be benign. Ongoing macroeconomic uncertainty raises concerns over asset quality. However, we expect asset quality to remain benign, coupled with buffer from ample provisions that Singapore Banks have built up through the course of the pandemic. We expect credit costs to continue trending at healthy levels in FY22F. Given the ongoing macroeconomic uncertainties, Singapore Banks’ management may be less inclined to write-back excess general provisions into FY22F.
Remain positive on Singapore Banks; maintain BUY on UOB and OCBC. 2Q22 results is likely to see good contributions from NIM expansion, offset by weaker contributions from non-interest income and higher operating expenses. We expect asset quality to continue to be benign. We remain positive on Singapore Banks as Singapore Banks are set to benefit strongly from the Fed rate hike cycle. While investors remain concerned over an overly hawkish Fed and recession risks, DBS Group Research economists believes that inflation is likely to slow ahead, and for the Fed to be done with tightening this year. We believe valuations will continue to draw support from good provisions’ buffer built up during the pandemic, as well as c.4-5% dividend yields.