3Q22 Roundup: Surging NIM Supports Hikes For DPS In 2023
NIM for Singapore banks expanded by an accelerated pace, averaging 32bp qoq in 3Q22. While the sequential NIM expansion is expected to moderate starting 1H23, we still see NIM enhanced by about 40bp on a full-year basis in 2023. We expect DBS and OCBC to increase their 2023 DPS by 22% and 7% respectively to S$1.76 and S$0.60. DBS and OCBC provide 2023 dividend yields of 5.2% and 5.1% respectively. Maintain OVERWEIGHT. BUY OCBC (Target: S$18.28) and DBS (Target: S$45.00).
• DBS Group Holdings’ (DBS), Oversea-Chinese Banking Corp’s (OCBC) and United Overseas Bank’s (UOB) results exceeded our expectations.
• Accelerated pace of NIM expansion. DBS, OCBC and UOB registered NIM expansion of 32bp, 35bp and 28bp qoq respectively in 3Q22. The US Fed hiked Fed Funds Rate by 50bp on 4 May 22 and 75bp on 15 Jun 22 with strong pass-through to higher domestic interest rates. Thus, DBS, OCBC and UOB were able to achieve strong growth in net interest income of 44%, 44% and 39% yoy respectively in 3Q22.
• Severe drop in fees from wealth management. Wealth management fees of DBS, OCBC and UOB declined by 13%, 40% and 34% yoy respectively in 3Q22. Trading volume has dwindled due to the weak investment climate. AUM was relatively stagnant due to a drop in market values despite the large inflow of new money driven by North Asia.
• UOB and OCBC registered growth in other non-interest income. UOB and DBS registered strong growth in other non-interest income of 66% and 32% yoy respectively. While the banks did not disclose a breakdown, we believe the surge was primarily driven by strong increase in customer flows for hedging of interest rates and forex exposures. Separately, OCBC clocked resilient income of S$318m from insurance (+21% yoy) due to net mark-to-market gains from assets and liabilities of insurance funds.
• Asset quality improves. NPL ratios have improved across the board for DBS (-0.1ppt qoq to 1.2%), OCBC (-0.1ppt qoq to 1.2%) and UOB (-0.2ppt qoq to 1.5%). DBS and UOB saw moderation in new NPL formation (DBS: S$278m and UOB: S$214m). The three banks also benefitted from strong upgrades and recoveries (DBS: S$411m, OCBC: S$669m and UOB: S$448m) after customers have exited loan relief programmes.
• General provisions provide cushion against external uncertainties. General provisions were 92bp, 90bp and 90bp of gross loans respectively for DBS, OCBC and UOB. DBS and UOB disclosed that their management overlays for general provisions were S$2.1b and S$1.4b respectively.
• Banks to reward shareholders with higher dividends in 2023. DBS expects its CET-1 CAR to jump to 16% when Basel 4 is implemented on 1 Jan 24, which provides a comfortable cushion of 2-3ppt above operating range of 12.5-13.5%. OCBC and UOB could see similar quantum of enhancement to their CET-1 CAR. DBS intends to review its dividend policy at end-22 with a view of hiking DPS in 2023. Likewise, we would look forward to higher DPS from OCBC in 2023 as well.