DBS & OCBC 4Q21 Results Preview - UOB Kay Hian 2022-02-07: Seasonal Lull With Stable Asset Quality

DBS GROUP HOLDINGS LTD (SGX:D05) OVERSEA-CHINESE BANKING CORP (SGX:O39)

DBS & OCBC 4Q21 Results Preview - Seasonal Lull With Stable Asset Quality

4Q is typically a seasonal lull. Banks are on track to achieve high single-digit loan growth with stable NIM. Non-interest income is seasonally softer. We expect pristine asset quality supported by the easing of COVID-19 restrictions.
We forecast DBS (SGX:D05) and OCBC (SGX:O39) to achieve net profit of S$1,490m (+47% y-o-y and -12% q-o-q) and S$1,122m (flat y-o-y and -9% q-o-q) for 4Q21.
BUY DBS (target price: S$40.28) and OCBC (target price: S$16.12) as banks are prime beneficiaries of rate hikes. Maintain OVERWEIGHT.

DBS (SGX:D05) is scheduled to release its 4Q21 results on 14 Feb 22 (Monday), followed by UOB (SGX:U11) on 16 Feb 22 (Wednesday) and OCBC (SGX:O39) on 23 Feb 22 (Wednesday).

We forecast DBS to report net profit of S$1,490m for 4Q21, up 47% y-o-y but down 12% q-o-q.
Steady loan growth underpinned by economic recovery. We expect DBS to clock loan growth of 1.2% q-o-q and 10.1% y-o-y in 4Q21 with broad-based expansion from non-trade corporate and consumer loans. NIM is stable at 1.43% as interest rates remain near-zero (three-month compounded SORA edged marginally higher by 6bp q-o-q to 0.19% in 4Q21).
Fees grew 16.4% y-o-y but dipped 2.1% q-o-q in 4Q21. Contribution from wealth management declined 3.5% q-o-q as liquidity is withdrawn due to QE taper. We expect contribution from cards to grow 8% y-o-y due to the resumption of cross-border travel through vaccinated travel lanes (VTLs).
Non-interest income seasonally weak. We expect net trading income to be seasonally lower at S$310m and gains from investment securities to be muted at S$100m in 4Q21.
Cost-to-income ratio is elevated at 47.6% as 4Q21 is a seasonally softer quarter.
Asset quality benign. We expect credit cost to moderate to 10p in 4Q21 (4Q20: 61bp) as asset quality remains benign. We expect a smaller write-back in general provisions of S$50m in 4Q21 (3Q21: S$138m). This is the fourth consecutive quarter of write-backs.
We expect DBS to maintain quarterly dividend at S$0.33 for 4Q21.

We forecast OCBC to report net profit of S$1,122m for 4Q21, flat y-o-y but down 9% q-o-q.
High single-digit loan growth. We expect loan growth to pick up to high single-digit expansion of 9.1% y-o-y and 2.2% q-o-q in 4Q21, driven mainly by network customers expanding overseas by acquiring logistics, data centre and student accommodation properties and sustainable finance. We expect NIM to be stable at 1.53%.
Stable contribution from fee income. We expect fees to grow 8.7% y-o-y but ease 1.2% q-o-q in 4Q21. Contribution from wealth management is expected to decline 6% q-o-q as liquidity is withdrawn due to QE taper.
Insurance to rebound y-o-y from a low base. We expect contribution from insurance to increase 14.8% y-o-y due to a low base effect (suffered negative impact from higher in 4Q20). We expect net trading income be muted at S$175m due to mark-to-market losses from Great Eastern (SGX:G07) in 4Q21.
Moderation in credit costs. We expect asset quality to be stable. 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 stable credit costs of 24bp in 4Q21 (3Q21: 23bp).

Be on guard against faster and steeper rate hikes. Core personal consumption expenditures (PCE) inflation has hit a 40-year high of 4.9% in Dec 21. Inflation has become more persistent and broad-based. The latest job report with non-farm payroll adding 467,000 jobs and unemployment rate at 4.0% in Jan 22 signal that the US economy could already be in full employment. Thus, the Fed is poised for a lift-off in interest rates during the next FOMC meeting on 15-16 Mar 22.
Preparing the ground for a rapid increase in interest rates. Fed Chairman Jerome Powell has not ruled out raising interest rates at every successive FOMC meetings this year. He has also not ruled out steeper rate hikes of 50bp. On the contrary, he emphasised that the economy is stronger and inflation much higher now compared with the last rate hike cycle in 2015-18. He also feels that there is quite a bit of room to raise interest rates without affecting the job market.
Maintain OVERWEIGHT. Banks are prime beneficiaries of higher interest rates. BUY DBS (target price: S$40.28) and OCBC (target price: S$16.12).

NIM expansion in 2H22, 2023 and 2024 driven by upcycle in interest rates.
Banks review their dividend payout ratio and pay more dividends as risks emanating from COVID-19 pandemic recede.
The easing of COVID-19 restrictions and recovery in 2H22 after the economy has weathered the Omicron variant wave.

Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2022-02-07

SGX Stock Analyst Report BUY MAINTAIN BUY 40.280 SAME 40.280

BUY MAINTAIN BUY 16.120 SAME 16.120