Singapore Banks: What could surprise beyond 3Q results?
- Net Interest Margin (NIM) to continue showing divergence; Net Interest Income (NII) supported as rate cuts are pushed further out
- Intensifying competition amidst weak loan demand could start to erode loan yields beyond 3Q23
- Fee income and asset quality to remain largely stable in 3Q23
- Prefer OCBC to UOB, as it has more headroom to lift dividends, higher provision coverage ratio
NIM to continue showing divergence; NII supported as rate cuts are pushed further out. During 2Q23, DBS previously guided for a net interest margin (NIM) upside of a few bps in 2H23, as July 2023 saw exit NIM of 2.20% (2Q23: 2.16%), while OCBC and UOB guided for NIMs near 2Q23 levels. We believe OCBC and UOB should see largely stable q-o-q NIMs for 3Q23 as funding pressures persist alongside July’s 25bps Fed hike. With rate cuts being pushed further out, DBS Group economists now only expect four rate cuts in 2H24, which should support NII for longer.
Intensifying competition amidst weak loan demand could start to erode loan yields beyond 3Q23. Intensifying competition amidst weak loan demand amongst local and foreign banks – fixed mortgage rates have continued to decline into October 2023, in part due to ample liquidity in the system. We believe that competition could continue to intensify going forward as incremental loans disbursed at tighter margins are still earnings accretive for the banks.
Fee income and asset quality to remain largely stable q-o-q in 3Q23. We expect overall fee income could remain largely stable q-o-q due to the absence of a more meaningful recovery in wealth management fees as markets continue to be challenging, with card fees buffering other fee income. 3Q23 is likely to continue seeing manageable credit costs, similar to 2Q23, as asset quality continues to remain benign, with the exception of OCBC, which should see reduced credit costs q-o-q (2Q23 credit costs was elevated at 31bps due to higher general allowances).
Prefer OCBC to UOB, as it has more headroom to lift dividends, higher provision coverage ratio.
OCBC and UOB’s share prices continue be supported by undemanding valuations of c.1x FY24F and high dividend yields of c.6%. While we do not see any immediate catalysts to its share prices as NII nears peak, we prefer OCBC to UOB, as OCBC has more headroom to lift dividends, alongside a higher provision coverage ratio of 131% compared to UOB’s 99%.