3Q23F: Modest qoq performance
- We think that Singapore banks will likely post flattish qoq earnings as NIMs largely stabilise. Fees should hold steady but material recovery will take time.
- We watch out for FY24F outlook in 3Q23F briefings. Asset quality will likely be a key focus area and could determine share price trajectory of the sector.
- Reiterate Neutral. We think there could be limited upside to NIMs as banks prioritise volumes over margins, but dividend yields >6% are compelling.
- Our preference for 3Q23F is OCBC, UOB, then DBS. We expect stronger qoq performance vs. peers as impairments ease from a high in 2Q23.
3Q23F: We look forward to FY24F outlook statements from mgmt.
We expect Singapore banks’ earnings to be rather muted in 3Q23F. We think that the Fed rates remaining high likely resulted in weaker corporate demand, therefore limiting credit growth across the industry. As a whole, we expect flattish NIMs across the sector in 3Q23F as asset yield growth slows amid still-hefty funding costs (given deposit-taking competition and Fed rate hikes over the year). With the Fed fund futures pricing in the first rate cut only in mid-2024, we think it may still take time for wealth management income to rise significantly as risk-on momentum builds up. While a key downside risk for the sector is severe asset quality deterioration as borrowers’ debt servicing abilities soften, we think that
banks’ earnings downside in this case may be mitigated by the write-back of their c.S$1bn2bn management overlays. At the current juncture, banks have not indicated systemic risks. We keep watch on banks’ management outlook for FY24F during the 3Q23F results briefings. UOB will report 3Q23F earnings on 26 Oct 23 (3Q23F: Volumes over margin, dated 11 Oct 23), DBS on 6 Nov 23, and OCBC on 10 Nov 23. We expect DBS to be the only bank to declare dividends in 3Q23F (c.48 Scts DPS, stable qoq). Any upward revision in DPS for the banks would likely take place only in 4Q23F, in our view.
DBS: We expect slight NIM expansion but higher credit costs
We expect DBS to post 3Q23F net profit of S$2.63bn (-2% qoq, +17% yoy) as underlying trends observed in 2Q23 persist. On balance, 3Q23F NIMs should still improve slightly (we expect +2bp qoq to 2.18%) as the higher HIBOR (though it dipped and rose over 3Q23) offset the effects of continued CASA outflow over Jul-Aug 23. Loan growth in 3Q23F also likely remained tepid, in line with banking system statistics. Fee income recovery likely continued in 3Q23F, led largely by wealth management income, which could result in overall mid-to-high-single-digit fee growth yoy. This should position DBS well to achieve its mid-single-digit fee growth guidance for FY23F, in our view. We understand that treasury customer sales likely stayed strong, though trading income could trend softer given the elevated volatility in 1H23. DBS remains watchful on asset quality, though it reiterates its full-year credit cost guidance of the lower end of c.10-15bp. We understand that general provision write-backs are unlikely in 3Q23F as underlying credit trends (and therefore expected credit loss [ECL] model inputs) remain stable. Nonetheless, we think that credit costs could trend slightly higher to c.12bp in 3Q23F given potential pockets of weakness.
OCBC: Likely better qoq performance as impairments ease
We expect OCBC to report 3Q23F net profit of S$1.78bn (+4% qoq, +11% yoy). We think NIMs will broadly hold steady in 3Q23F (-1bp qoq to 2.25%) as stabilising asset yields (given the pause in Fed rate hikes) are balanced by hefty funding, which remains on the books. Although funding costs should ease in 2H23F (as longer-dated fixed deposits issued at peak c.4% rates offered at end-2022 mature), further NIM expansion could be challenging given the muted loan growth observed across the banking industry. We think that wealth management income should hold up qoq as volatility eases. OCBC remains watchful of the asset quality of its loan portfolio, particularly exposures to developed markets such as the US and the UK. Although pockets of weakness could turn up in 3Q23F figures (given uncertainties over the commercial real estate sector), overall credit costs should remain close to management’s guidance of c.20bp for FY23F given OCBC’s c.S$1bn management overlays, in our view.
Upside and downside risks of the sector
Stronger and sustainable treasury income and wealth management fees are key upside risks. A significant deterioration in asset quality as a result of the higher interest rate environment is a downside risk.