DBS OCBC 3Q21 Earnings Preview - UOB Kay Hian 2021-10-22: Resilient Earnings; Stable Asset Quality


DBS OCBC 3Q21 Earnings Preview - Resilient Earnings; Stable Asset Quality

  • OCBC and UOB are scheduled to release their 3Q21 results on 3 Nov 21 (Wednesday), followed by DBS on 5 Nov 21 (Friday). We expect banks to report resilient earnings.
  • We see a pick-up in loan growth partially offset by NIM compression. With asset quality stabilising, we expect DBS to benefit from write-back in general provisions and OCBC to see moderation in credit costs. We forecast DBS and OCBC to achieve net profit of S$1,622m (+25% y-o-y and -5% q-o-q) and S$1,163m (+13% y-o-y and flat q-o-q) respectively for 3Q21.
  • BUY DBS (Target: S$35.80) and OCBC (Target: S$15.65). Maintain OVERWEIGHT.

DBS: Pristine asset quality prevails.

  • We forecast DBS (SGX:D05) to report net profit of S$1,622m for 3Q21, up 25% y-o-y but down 5% q-o-q.
  • Uptick in loan growth supported by healthy pipeline. We expect loans to expand 8.3% y-o-y and 1.4% q-o-q in 3Q21 with broad-based growth from non-trade corporate loans, residential mortgages and wealth management loans. We expect NIM to narrow 2bp q-o-q 1.43% due to near-zero interest rates (average 3-month compounded SORA receded 5bp q-o-q to 0.13%).
  • Resilient fees. We expect DBS's total fees & commissions to grow 8% y-o-y but stay flat q-o-q in 3Q21, and wealth management fees to rebound 6% q-o-q to S$450m as high net worth clients reposition their portfolio to weather elevated inflation and higher interest rates. We expect contributions from DBS's loan-related, transaction services and cards to be flat q-o-q.
  • We expect net trading income to moderate slightly by 5% q-o-q to S$400m in 3Q21.
  • Asset quality has stabilised. NPL formation is benign and NPL ratio eased marginally by 1bp q-o-q to 1.50%. DBS has fortified its balance sheet with general provisions reserves of S$4.1b as of Jun 21, which exceeded MAS' minimum requirement by S$0.8b. We anticipate write-back in general provisions of S$80m in 3Q21 (1Q21: S$190m and 2Q21: S$85m), its third consecutive quarter of write-backs. We expect credit costs of 10bp in 3Q21 (1H21: 4.5bp).
  • We expect DBS to maintain quarterly dividend at S$0.33.
  • See

OCBC: Tinge of weakness from insurance.

  • We forecast OCBC (SGX:O39) to report net profit of S$1,163m for 3Q21, up 13% y-o-y but flat q-o-q.
  • Gradual pick-up in loan growth. Loan growth was muted at 3.9% y-o-y and 1.6% q-o-q in 3Q21, driven mainly by network customers expanding overseas by acquiring logistics, data centre, healthcare and student accommodation properties and sustainable finance. We expect NIM to slip marginally by 1bp q-o-q 1.57%.
  • Stable contributions from fee income. We expect OCBC's total fees & commissions to recover by 14% y-o-y but stay flat q-o-q in 3Q21, and wealth management fees to rebound 4% q-o-q. We expect other sources of fee income to be relatively stable q-o-q.
  • Weakness from insurance. We expect contribution from OCBC's insurance business to weaken 20% q-o-q due to potential mark-to-market losses from its bond portfolio. We expect net trading income to moderate slightly by 15% q-o-q to S$180m in 3Q21.
  • Moderation in credit costs. We expect asset quality to have stabilised. OCBC has set aside management overlay of more than S$500m, which is above the amount of general provisions required by its macro-economic variable (MEV) model. We expect slight easing of credit costs to 30bp in 3Q21 (2Q21: 34bp).
  • See


  • Singapore GDP grew 6.5% y-o-y in 3Q21 powered by growth in the services sector. The recent tightening of safe distancing measures did not affect economic activities as Singapore is well adjusted to living with COVID-19 as an endemic and working from home. For Singapore banks, asset quality continues to improve and earnings stay resilient. The sector provides attractive average dividend yield of 4.1% for 2021 and 4.7% for 2022.
  • We maintained our DBS and OCBC's earnings forecast for 2021 largely unchanged.

ASEAN countries to benefit from broader cyclical recovery in 2022.

  • According to The World In Data, 71% of Malaysia’s population is already fully vaccinated, followed by 36% for Thailand and 23% for Indonesia. Regional countries are starting to reopen their economies.
    • Malaysia has allowed interstate travel for fully vaccinated adults starting 11 Oct 21.
    • Thailand has allowed quarantine-free travel for vaccinated tourists from 10 countries to visit Bangkok and nine other regions starting 1 Nov 21.
    • Indonesia has also reopened Bali, Batam and Bintan to tourists from 18 countries with valid COVID-19 treatment insurance coverage on 14 Oct 21 but requires a 5-day quarantine upon arrival.
  • Banking sector catalysts:
    • Recovery in banks’ earnings due to a decline in credit costs in 2021 and 2022.
    • Continued recovery of the Singapore domestic economy accompanied by the easing of safe distancing measures. Recovery in manufacturing and exports.
  • Sector risk: Escalation of geopolitical tension and trade conflict between the US and China.

Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2021-10-22
SGX Stock Analyst Report BUY MAINTAIN BUY 15.650 SAME 15.650