2Q22 Roundup: Surging NIM Supports Hikes For DPS In 2023
The accelerated pace of NIM expansion and increased sensitivity to higher interest rate are a pleasant surprise. We expect DBS and OCBC to increase DPS by 17% and 7% respectively to S$1.68 and S$0.60 in 2023. DBS and OCBC provide attractive 2023F dividend yield of 5.2% and 5.1% respectively. OCBC is most resilient with the highest CET-1 CAR of 14.9%, followed by 14.2% for DBS. Maintain OVERWEIGHT.
BUY OCBC (Target: S$16.18) and DBS (Target: S$43.60).
WHAT’S NEW
• DBS Group Holdings’ (DBS) and Oversea-Chinese Banking Corp’s (OCBC) results exceeded expectations, while United Overseas Bank’s (UOB) were in line.
• Massive NIM expansion. DBS, OCBC and UOB registered NIM expansion of 12bp, 16bp and 9bp qoq respectively in 2Q22, supported by strong pass-through from hikes in US Fed Funds Rate to higher domestic interest rates. SORA and three-month SIBOR increased 105bp and 112bp qoq respectively to 1.66% and 1.91% during the quarter. Banks have also strengthened their funding franchise with DBS, OCBC and UOB improving their CASA ratio by 13.6ppt, 13.0ppt and 11.5ppt respectively to 72.3%, 60.9% and 54.7% over the past three years. Thus, DBS, OCBC and UOB were able to achieve strong growth in net interest income of 17.5%, 16.4% and 18.1% yoy respectively in 2Q22.
• High net worth clients’ risk appetite affected by Russia-Ukraine war. DBS, OCBC and UOB’s wealth management fees declined by 21%, 25% and 27% yoy respectively in 2Q22. Other sources of fee income were more resilient. Loans-related fees expanded 3% yoy at DBS, 5% yoy at OCBC and 10% yoy at UOB. Contributions from credit cards recovered 23% yoy for DBS and 44% yoy for UOB due to increased customer spending with the reopening of international borders and pick-up in air travel.
• Resilient contribution from Great Eastern. OCBC generated income of S$423m from life and general insurance, an increase of 66% yoy, due to higher operating profit and mark-to-market gains (decline in insurance contract liabilities due to utilisation of a higher discount rate to value these liabilities).
• Asset quality has improved at OCBC. OCBC’s NPL balance dropped 8% qoq while NPL ratio receded 0.1ppt qoq to 1.3% in 2Q22. New NPL formation moderated to S$182m, lower than S$296m in 1Q22. OCBC benefitted from strong recoveries/upgrades for NPLs of S$419m due to oil & gas accounts in Singapore and repayment from customers in Malaysia and Indonesia after their loan relief programmes ended.
• DBS has sufficient general provisions to cushion against external uncertainties. DBS has set aside management overlays of S$1.8b. Management does not intend to add to the buffer, which already provides a substantial cushion. Its total general provisions of S$3,737m represent 87bp of gross loans. Management expects credit costs to normalise higher to 18-20bp in 2023.
• Strong balance sheet provides resiliency. OCBC has the highest CET-1 CAR of 14.9%, followed by 14.2% for DBS. DBS intends to review its dividend policy at end-22 with a view of hiking DPS in 2023.
ACTION
• The Fed’s renewed fervour to clamp down on inflation. The Fed has accelerated the tempo of interest rate hikes to quell inflationary pressures. It hiked the Fed Funds Rate by a massive 75bp to 1.50% after the FOMC meeting on 15 Jun 22. Based on the Fed’s dot plot, the median projected path for Fed Funds Rate would hit 3.4% by end-22 and 3.8% by end-23. The forecast translates to four hikes totalling 200bp in 2H22. The Fed hiked the Fed Funds Rate by another 75bp on 27 Jul 22. The intensity of rate hikes could ease after the FOMC meeting on 21 Sep 22.
• Exposure to Mainland China. Singapore banks predominantly service the offshore needs when Chinese companies expand overseas through trade and investments. The trade finance and loan facilities provided are usually denominated in the US Dollar and booked offshore in Singapore and Hong Kong. Banks also support existing network customers within ASEAN when they expand into China. Their involvement in domestic business activities of domestic companies is limited.
• 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. Banks gain bargaining power as liquidity is tightened due to higher interest rates and quantitative tightening. They benefit from NIM expansion with DBS being the most sensitive to higher interest rates. The Russia-Ukraine war causes inflation to be elevated, which could keep bond yields higher for longer. OCBC and UOB benefit from reorientation of supply chains towards ASEAN countries. BUY DBS (Target: S$43.60) and OCBC (Target: S$16.18) for their 2023 dividend yields of 5.2% and 5.1% respectively.
SECTOR CATALYSTS
• NIM expansion in 2022 and 2023, driven by upcycle in interest rates.
• Economic recovery driven by the reopening and easing of COVID-19 restrictions.
• Banks pay more dividends as risks emanating from COVID-19 pandemic recede.
RISKS
• Escalation of the Russia-Ukraine war beyond Ukraine.
• Geopolitical tension and trade conflict between the US, China and Russia.