Highlighted Companies
DBS Group ADD, TP S$40.20, S$32.42 close
DBS had an estimated S$1.5bn in management overlays as at 2Q22. The asset quality of its onshore Mainland China property exposures (c.0.5% of group loans in 2Q22) remains contained; the majority of these were extended to state-owned enterprises (SOEs).
OCBC ADD, TP S$15.50, S$11.48 close
OCBC’s robust CET-1 of c.15% remains a key tool, whether for M&As or to cushion against asset quality deterioration. Clarity on capital management plans are a rerating catalyst.
United Overseas Bank ADD, TP S$35.60, S$26.09 close
We believe write-backs of management overlays would be unlikely until Covid-19 truly blows over. The credit quality of UOB’s portfolio of loans under moratorium remains healthy. Its key risk of asset quality concerns from its SME and ASEAN portfolio have been well contained, in our view.
3Q22F: High rates lift all banks
- We expect c.24-30bp qoq NIM expansion across banks in 3Q22F, which should offset continued fee income weakness and normalising credit costs.
- In upcoming briefings, watch for outlook for peaking NIMs (we expect: 4Q22F-1Q23F), FY23F credit cost (c.20-25bp), FY23F loan growth (c.4-5%).
- Reiterate Overweight. Unabated inflation points to continued Fed rate hikes.
- For 3Q22F results, we think DBS may outperform peers on the back of stronger NIM expansion (+c.30bp) and lower impairments (c.15bp).
3Q22F: the NIM expansion we’ve all been waiting for
We expect the delayed NIM expansion from numerous US Fed rate hikes this year to finally come through more substantially for Singapore banks in 3Q22F earnings. Although snaking queues to place fixed deposits (FDs) at multi-year high rates hint at continued outflow of CASA (into FDs and higher yielding instruments such as Singapore Savings Bonds, T-bills, etc.) as we saw in 2Q22, the simultaneous repricing of loan portfolios on higher benchmark rates (average quarterly 3MSIBOR/3MSORA/3MLIBOR rose c.1.27%/c.0.97%/c.1.5% in 3Q22) should still provide a sizeable c.24-30bp qoq boost to NIMs in 3Q22F. That said, 3Q22F loan growth will likely slow (we expect c.1% qoq in 3Q22F) given weaker sentiment amid recession risks. On non-II, we think that fee income could stay flattish, weighed down by soft wealth management volumes, while trading income may benefit from heightened activity given the volatile market conditions. Credit costs could normalise upwards at c.15- 23bp in 3Q22F (from c.4-21bp in 2Q22F), including management overlay top-ups.
DBS: we expect +30bp qoq NIM in 3Q22F; CTI trending down to 40%
We expect DBS to post 3Q22F net profit of c.S$2.05bn (+13% qoq, +21% yoy), driven mainly by a more substantial pass-through of rate hikes into NIMs. Recall that DBS’s average NIM in Jul was 1.8% (vs. 1.58% in 2Q22) – we forecast a c.30bp qoq expansion to c.1.88% in 3Q22F. We understand that DBS’s NIM sensitivity to Fed rates guidance (previously c.S$18m-20m per 1bp of Fed rate hike) may be revised downwards given larger CASA outflows (higher funding cost pressures) as Fed rates exceed c.3.5%. We expect non-II to remain relatively steady while opex stays stable. On balance, the bank’s stronger topline could tip its CTI ratio lower towards c.40% in 3Q22F. We pen in c.15bp credit costs in 3Q22F which include a top-up in management overlays.
OCBC: rising margin expansion not over yet; no M&A in the works
We expect OCBC to record 3Q22F net profit of c.S$1.6bn (+9% qoq, +31% yoy). Contrary to the bank’s expectations that NIM expansion could slow in 2H22F (given that it outperformed peers in 2Q22), we understand that margins could continue widening as the boost to asset yields (e.g. on short-term trade facilities) outpaces the shift from CASA into higher-yielding instruments; we expect c.+24bp qoq to 1.95% in 3Q22F. Fee income likely remained flattish as sentiment on investment banking (IB), bancassurance and wealth management was unchanged (weak) qoq. As OCBC had adjusted staff wages in 2Q22, we forecast opex at the new higher run rate. A normalisation of credit costs towards the lower-end of c.20-25bp in FY22F may be expected, translating to c.23bp in 3Q22F, in our estimate. We understand OCBC has no particular M&A target in Indonesia at this juncture.
UOB: NIM expansion to overshoot initial 20bp expectation for 2H22F
We expect UOB to post 3Q22F net profit of c.S$1.26bn (+13% qoq, +21% yoy), driven by NIM expansion overshooting management’s initial guidance (+20bp in 2H22F). We forecast NIMs to rise c.27bp qoq to 1.94% in 3Q22F. Although UOB has been aggressive in offering market-leading FD rates, this has been in anticipation of rates further rising going forward. We think its fee income could remain moderate as wealth management sentiment stays soft, but trading and investment income (from heightened hedging activity) could compensate for this. Watch out for higher opex for wage adjustments and new headcount, though CTI should remain contained at c.43-44%. A chunky NPL writeback (property exposure) should result in lower impairments in 3Q22F; we expect c.12bp.
