3Q23 Round-up: Building Buffers To Weather Heightened Geopolitical Uncertainties Banks delivered resilient earnings in 3Q23 (DBS: +16% yoy, OCBC: +21% yoy) with NIM expansion yoy, enhanced cost discipline and benign asset quality. Geopolitical uncertainties have increased. Singapore banks can better weather the volatilities due to strong capital adequacy and stable asset quality. DBS and OCBC provide attractive 2024 dividend yields of 6.0% and 6.2% respectively. BUY OCBC (Target: S$17.35), followed by DBS (Target: S$44.28). Maintain OVERWEIGHT.
WHAT’S NEW
• DBS Group Holdings’ (DBS) and Oversea-Chinese Banking Corp’s (OCBC) 3Q23 results were slightly above our expectations. Assuming that consensus estimate of S$1,483m excluded one-off expenses of S$97m for Citi integration cost, United Overseas Bank (UOB) would have performed in line with expectations.
• DBS and OCBC outperform in NIM expansion. DBS and OCBC registered more sizeable NIM expansions of 29bp and 21bp yoy respectively in 3Q23 (UOB: +14bp yoy). On a sequential basis, DBS’ and OCBC’s NIM also expanded slightly by 3bp and 1bp qoq respectively (UOB: -3bp qoq). UOB deployed surplus liquidity to high-quality low-yielding assets, which resulted in moderation in NIM. Thus, DBS and OCBC achieved stronger growth in net interest income of 16% and 17% yoy respectively (UOB: 9% yoy).
• UOB has strengthened deposit franchise. UOB has maintained CASA ratio at 48.2% as of Sep 23 despite higher interest rates for fixed deposits. Conversely, DBS’ and OCBC’s CASA ratio has deteriorated 12.3ppt and 9.8ppt yoy respectively to 53.4% and 46.3%.
• DBS and UOB saw stronger growth in fee income of 9% and 14% yoy respectively (OCBC: +2% yoy). DBS benefitted from strong recovery of wealth management of 22% yoy (OCBC: 9% yoy, UOB: 11% yoy). DBS’ loans and trade-related fees grew by 12% yoy (OCBC: -2% yoy, UOB: 5% yoy). UOB’s credit card fees jumped by a sizeable 89% yoy to new record high of S$104m due to higher customer spends and its enlarged regional franchise with the consolidation of Citi consumer businesses (DBS: 21% yoy).
• Enhanced cost efficiency. Banks delivered positive Jaws with revenue growth exceeding the increase in operating expenses. DBS, OCBC and UOB (exclude Citi integration costs) have controlled the increase in operating expenses at 12%, 5% and 4% yoy respectively. Cost-to-income ratios (CIR) have fallen below 40.0% at 39.3% for DBS and 39.1% for OCBC (UOB: 41% if we exclude Citi integration costs).
• Asset quality was benign. OCBC’s and UOB’s NPLs decreased by 5.5% and 3.5% qoq respectively due to benign NPL formation and continued upgrades and recoveries. DBS’ NPLs jumped 6% qoq in 3Q23 due to the integration of Citibank Taiwan. DBS incurred specific provisions of about S$100m due to exposures linked to the recent money laundering case in Singapore (financing for purchase of real estate).
• Delivering high ROE. DBS, OCBC and UOB reported high ROEs of 18.2%, 14.0% and 13.9% respectively.
ACTION
• Maintaining a delicate balance. The US Fed has kept Fed Funds Rate unchanged for the second consecutive meeting on 1 Nov 23. Chair Jerome Powell described the current stance for monetary policy as significantly restrictive. Nevertheless, he cautioned that the Fed would not hesitate if it becomes appropriate to tighten monetary policy further to bring inflation back down to its long-term target of 2%. He indicated that the Fed would proceed cautiously to address both risks of being misled by a few months of positive data and risk of over tightening. The Fed still has a long way to go before achieving its goal for price stability.
• Banks as proxy to growth in ASEAN countries. ASEAN countries have a large combined population of 680m and account for about 8% of global exports. Many multinational companies have adopted the China+1 strategy and plan to set up alternative production facilities within the ASEAN region. Malaysia, Thailand, Indonesia and Vietnam are seeing growth in foreign direct investments. OCBC and UOB benefit from the reorientation of supply chain due to their extensive network within ASEAN countries.
• Maintain OVERWEIGHT. Banks provide attractive value proposition with low P/B of 1.12x and sustainably high yield of 6.3% for 2024. Our top BUY pick is OCBC (Target: S$17.35) for its new dividend policy with payout ratio at 50%, focus on ASEAN and defensively low 2024F P/B of 1.06x. We like DBS (Target: S$44.28) due to its excellence in execution and consistency in delivering good results.
ASSUMPTION CHANGES
• We raised our 2023 earnings forecast for DBS by 0.6% due to good 3Q23 results.
• We trimmed our 2024 earnings forecast for OCBC by 1% after factoring in slightly lower NIM
SECTOR CATALYSTS
• Banks delivering resilient earnings as interest rates stay higher for longer.
• Banks review capital management and returning surplus capital to shareholders.
RISKS
• Escalation of the Russia-Ukraine war and Israel-Hamas war.
• Geopolitical tension and trade conflict between the US, EU and China.