DBS GROUP HOLDINGS LTD (SGX:D05)
OVERSEA-CHINESE BANKING CORP (SGX:O39)
DBS & OCBC 1Q22 Results Preview - Toning Down Expectations As Geopolitical Tension Escalates
- DBS (SGX:D05), OCBC (SGX:O39) and UOB (SGX:U11) are announcing their 1Q22 results on 29 Apr 22 (Friday).
- 1Q22 is characterised by a reversal in NIM expansion, weak wealth management fees and stable asset quality. We expect the Fed to raise Fed Funds Rate by 50bp at the next FOMC meeting on 3-4 May and NIM expansion to be more pronounced starting 3Q22.
- We forecast DBS and OCBC to achieve net profit of S$1,700m (-15% y-o-y and +22% q-o-q) and S$1,110m (-26 y-o-y and +14% q-o-q) respectively for 1Q22.
- BUY DBS (Target price: S$37.55) and OCBC (Target price: S$15.05). Maintain OVERWEIGHT.
Series of 50bp hikes in the making.
- Many Fed officials have voiced support for 50bp hikes during upcoming FOMC meetings as well as frontloading interest rate hikes in 2022. Vice Chair Lael Brainard has recently stressed that the Fed is prepared to take stronger action in raising interest rates as controlling inflation is of paramount importance. Many FOMC participants judged that it is appropriate to move monetary policy towards a neutral posture expeditiously, which could entail raising the Fed Funds Rate to about 2.5% by end-22. This implies successive hikes of 50bp during upcoming FOMC meetings on 3-4 May and 14-15 June.
- Acclimatising to heightened geopolitical tension. The attack on Kyiv has stalled and the risk of Ukraine’s capital Kyiv being seized by Russians has abated. Russian forces have regrouped to concentrate on the breakaway Donbas region. Unfortunately, the conflict could degenerate into a protracted stalemate as Russians deploy siege tactics in the new battleground of Eastern Ukraine.
US labour market remains resilient.
- The US economy added 431,000 jobs in Mar 22 as hotels, restaurants, retailers and manufacturers hired more workers. The unemployment rate dropped from 3.8% to 3.6%, which is near pre-pandemic levels and the 50-year low of 3.5% in Feb 20. Increase in average hourly earnings remains robust at 5.5% y-o-y. Chairman Jerome Powell said the labour market is tight to an unhealthy extent.
- The resilient labour market supports growth in domestic consumption. It will help the economy to weather the series of interest rate hikes and generate sustained recovery.
US yield curve no longer inverted.
- The 10-year to two-year term premium was in negative territory for only two days in early-April. It has since recovered to positive territory for the past two weeks and is currently 36bp.
- Maintain OVERWEIGHT. Tighter monetary policy and higher interest rates are positive for banks. The Russia-Ukraine war exacerbates higher inflation, which keeps bond yield higher for longer.
- We cut our 2022 earnings forecast for DBS & OCBC by 4% due to lower contribution from wealth management and higher operating expenses.
- BUY DBS (Target price: S$37.55) and OCBC (Target price: S$15.05) for their 2022 dividend yields of 4.4% and 4.7% respectively.
DBS (SGX:D05)
- We forecast DBS's net profit to rebound 22% q-o-q to S$1,700m for 1Q22. On a y-o-y basis, earnings are down 15% as 1Q21 was a high base with record wealth management fee of S$519m and a huge write-back in general provisions of S$190m.
- Nascent green shoot of impending NIM expansion. We expect DBS to clock loan growth of 1.5% q-o-q and 7.2% y-o-y in 1Q22. NIM edged marginally higher by 1bp q-o-q to 1.44% in 1Q22. Three-month compounded SORA has edged higher by 8bp q-o-q to 0.27% in 1Q22 in response to the first hike of 25bp for the Fed Funds Rate in mid-March.
- Fees rebounded 5% q-o-q but contracted 10% y-o-y in 1Q22. Contribution from wealth management dropped 24% y-o-y due to a high base last year. High net worth clients’ risk appetite was dampened in March due to the Russia-Ukraine war. We expect healthy growth from cards, transaction services and loans-related fees.
- Non-interest income lower y-o-y due to high base. We expect other non-interest income to decline 22% y-o-y in 1Q22 due to a high base. DBS achieved a doubling of net trading income and sizeable gains from investment securities last year.
- We expect operating expenses to increase 4.5% y-o-y and cost-to-income ratio at 45.4%.
- Asset quality stays benign. We expect NPL ratio to be stable at 1.3%. We expect credit cost to remain muted at 5p in 1Q22 (4Q21: 3bp) due to a smaller write-back in general provisions of S$30m in 1Q22 (4Q21: S$34m).
- We expect DBS to maintain quarterly dividend at S$0.36 for 1Q22.
- Our target price of S$37.55 for DBS is based on 1.57x 2023F P/B, derived from Gordon Growth model (ROE: 12.1%, COE: 8.25%, Growth: 1.5).
- See
OCBC (SGX:O39)
- We forecast net profit of S$1,110m for OCBC in 1Q22, a rebound of 14% q-o-q but down 26% y-o-y. 1Q21 was a high base due to robust wealth management fees, insurance income and net trading income, coupled with lower provisions.
- On track to achieve mid to high single-digit loan growth. We expect loan growth of 7.9% y-o-y and 1.0% q-o-q in 1Q22, driven mainly by network customers expanding overseas to acquire logistics, data centre and student accommodation properties and sustainable finance. We expect NIM to edge marginally higher by 1bp q-o-q to 1.53%.
- Weakness from market-sensitive sources of income. We expect fees to recover 5% q-o-q but ease 5% y-o-y in 1Q22. Contribution from wealth management is expected to decline 14% y-o-y as investors’ risk appetite was affected by the Russo-Ukrainian war. The equity market has stayed resilient despite mayhem in the fixed income markets during 1Q22. We expect contribution from insurance to decline 61% y-o-y (insurance income tripled y-o-y to S$469m in 1Q21). We forecast OCBC's net trading income to be muted at S$100m due to mark-to-market losses from Great Eastern.
- Moderation in credit costs. We expect asset quality to be stable. OCBC has set aside management overlay of more than S$400m, which is above the amount of general provisions required by its macro-economic variable (MEV) model. We expect stable credit costs of 23bp in 1Q22 (1Q21: 24bp).
- Our target price of S$15.05 for OCBC is based on 1.20x 2023F P/B, derived from the Gordon growth model (ROE: 9.8%, COE: 8.25%, Growth: 0.5%).
- See
Sector catalysts:
- Economic recovery driven by reopening and easing of COVID-19 restrictions.
- Banks pay more dividends as risks emanating from COVID-19 pandemic recede.
Jonathan KOH CFA
UOB Kay Hian Research
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https://research.uobkayhian.com/
2022-04-19
SGX Stock
Analyst Report
37.550
DOWN
39.550
15.05
DOWN
15.500
