Singapore Bank - Maybank Research 2022-04-14: 1Q22 What To Expect

DBS GROUP HOLDINGS LTD (SGX:D05) OVERSEA-CHINESE BANKING CORP (SGX:O39) UNITED OVERSEAS BANK LTD (SGX:U11)

Singapore Bank - 1Q22 What To Expect

DBS (SGX:D05), OCBC (SGX:O39) and UOB (SGX:U11) are set to report their 1Q22 trading update on 29 April. We think a critical downside risk could be weak trading income and mark-to-market losses on investment securities given the substantial macro-volatility during the quarter. This could heighten earnings disappointment risks.
On the other hand, we expect core-businesses to show resilience, especially loan growth and improving margins.

From a timing perspective, a bulk of delivery could be skewed towards 2H22, as loan re-pricing gets reflected and customer investments accelerate from regional re-opening. We would consider 1Q results-related weakness as an opportunity to accumulate.
Top picks – DBS (SGX:D05) and UOB (SGX:U11) for their regional franchise, strong balance sheet and dividend visibility.

JP Morgan (JPM US) reported a major loss of US$524m in 1Q trading income from credit valuation adjustments and market volatility. Over the past 5-years, trading contribution for Singapore banks is ~8% of income (17% for OCBC (SGX:O39) if insurance is included). This may see downside-surprise risks from similar reasons to JP Morgan. Customer related flows (estimated ~70% of trading) from increased hedging activities may provide some offset.
Additionally, mark-to-market losses on investment securities is a further downside risk (2-3% of income).

Core-operations are likely to hold up, in our view. We expect timing delays for loan growth to manifest in 1Q22. The Russia-Ukraine invasion and global volatility could potentially affect corporate drawdown schedules. Commodity-linked sectors could be the exception driven by higher working capital needs.
Nevertheless, we do not expect any material downgrades to loan growth guidance (MIBG estimates +8.6% y-o-y 2022E) given the underlying regional re-opening momentum and potential acceleration of North-South supply chain shifts. While SIBOR was +29bps higher in 1Q, expect re-pricing momentum to show up later in the year. Fed rate-hikes remain a key tailwind for the sector.

As regional re-opening gathers pace and loan moratoriums fade, we expect asset quality to remain well supported (2022E sector NPL 1.4%). However, weakness in Europe and China plus higher inflation forecasts may drive upgrades to general provisions as macro-factors are updated. The improved outlook for oil & gas could result in some write-backs against provisions taken in the 2017-18 cycle.
Separately, we do expect opex – particularly staff and IT – to continue its upwards trajectory. Border re-openings could take some pressure off staffing costs, especially in Singapore, but this is likely in the latter part of the year, in our view.

Thilan Wickramasinghe Maybank Research | https://www.maybank-ke.com.sg/ 2022-04-14

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