CGS-CIMB remains 'neutral' about banks as it expects to see mixed NIM performances ahead of 1Q earnings

UOB will release its results on April 27. DBS will release its results on May 2 while OCBC will announce its results on May 10.

CGS-CIMB Research analysts expect a mixed net interest margin (NIM) performance for Singapore’s three banks, ahead of the upcoming earnings season.

The analysts Andrea Choong and Lim Siew Khee say that DBS Group Holdings (DBS), Oversea-Chinese Banking Corporation (OCBC) and United Overseas Bank (UOB) are likely beneficiaries of strong wealth inflows in 1QFY2023, but the return of risk-on sentiment will likely depend on the Federal Reserve (US Fed) rate outlook.

Choong and Lim reiterate their “neutral” stance, as the key driver of share price movement will fall on the banks' managements' outlook on overall growth and asset quality.

In their April 15 report, the analysts note that NIM expansions are tapering off, but the difference in the performance of NIMs for the three banks is due to their different funding profiles. Meanwhile, the difference in performance in wealth management can be attributed to a risk-off from banking sector fallouts in March, offsetting a pick-up earlier in the quarter, and a different high net worth customer segmentation.

Choong and Lim believe that loan growth across banks will likely remain muted due to a combination of weak investment sentiment, continued loan repayments and banks being selective. That said, the strong wealth inflows into Singapore amid global volatility provide dry powder for deployment into wealth management products when risk sentiments approve.

For DBS, the analysts expect “a bit more NIM upside to go”, with a 1QFY2023 net profit of [around] $2.3 billion, which is down by 2% from DBS’s 4QFY2022 results and 27% y-o-y higher than its net profit during the 1QFY2022.

“[DBS’s] NIM expansion likely slowed further as asset repricing is gradually completed – we think this could halve to [around] 8 basis points (bps) (vs. +15 bps in 4QFY2022). Although likely still weaker y-o-y, 1QFY2023 fees likely rebounded q-o-q from the seasonal weakness in 4QFY2022 as business activity re-booted for the year,” they say.

The analysts also expect a modest loan growth of [around] 1% q-o-q, driven by corporate loans as consumer demand was subdued.

DBS likely benefited from strong wealth inflows given acute banking sector volatility over 1QFY2023, but wealth management income could stay soft as negative risk sentiment persists. Steady asset quality will also likely translate into low credit costs, as the analysts expect [about] 13 bps in 1QFY2023.

They note that DBS’s US and European exposures are small and there are no impairments needed for its debt investment portfolio.

For OCBC, the analysts expect some market-to-market recoveries, resulting in [about] a net profit of $1.55 billion in 1QFY2023, 19% up q-o-q and 14% higher y-o-y.

They note that the bank’s loan growth will be flat in this period, in line with the broader industry, but expect [around] 0.5% q-o-q on the back of continued loan repayments from both retail and corporate customers.

Meanwhile, they expect OCBC’s NIM performance to hold steady around current levels, as higher funding costs are priced in.

“We note that OCBC recorded a quicker NIM repricing over FY2022 compared to peers ([around] 79 bps cumulative increase vs. peers’ [around] 62 - 66 bps),” they say.

Despite most fee income lines benefiting from a pick-up in business activity over the quarter, the analysts note that OCBC’s wealth management fees remain soft despite better q-o-q. But some mark-to-market recoveries could result from its Great Eastern portfolio, due to a smaller inversion of the yield curve.

Credit cost should remain within guidance — we expect [around] 20 bps in 1QFY2023, the analysts say.

Finally, Choong and Lim say there will be “green shoots in wealth management, but expect [a] weaker NIM” for UOB.

The analysts expect the bank to record a net profit of $1.5 billion (8% q-o-q, +67% y-o-y) in 1QFY2023.

But in contrast to DBS and OCBC, the analysts believe that UOB’s loans contracted [around] 1% q-o-q in 1Q2023 amid muted demand and more corporates paying down their debt.

NIMs also likely contracted at about 6 bps q-o-q as higher funding costs were priced in while asset yields stayed flat in 1QFY2023. However, the analysts say that this could reverse in 2QFY2023 as asset yields track the Fed rate hikes in February to March.

“These weaker trends may be offset by strong fees – largely a result of wealth management customers starting to redeploy funds amid a broad-based uptick in business activity. We think that treasury income was likely strong on the back of sustained hedging activity,” they say.

Accounting for management overlay top-ups, the analysts expect credit costs to stay stable at its [around] 20 bps run rate.

The analysts have given their calls for the three banks, with DBS at “hold”, and “add” for OCBC and UOB, with their respective target prices of $35.70, $13.50 and $33.30.

UOB will release its results for the 1QFY2023 ended March on April 27. DBS will release its results on May 2 while OCBC will round up the lot with its results announcement on May 10.

Shares in DBS, OCBC and UOB closed at $32.63, $12.79 and $29.69 respectively on April 21.

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