Singapore Banks - Maybank Research 2022-04-29: 1Q22 Results Wrap

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

Singapore Banks - 1Q22 Results Wrap

DBS (SGX:D05) and OCBC (SGX:O39) 1Q22 earnings were in-line with Street, while UOB (SGX:U11) was below from weak trading income.
The sector is in the early phase of operational growth with rising NII supported by robust loans and improving NIMs. As rates increase and regional re-opening gathers pace, we expect momentum to accelerate – especially in to 2H22.
Asset quality and tail risks from geo-politics, inflation and uncertain macro need to be watched, but strong capital levels and provisions provide offsets. Maintain Positive.

We upgrade OCBC (SGX:O39) to BUY on unchanged target price of S$14.04. Preferred pick DBS (SGX:D05) given low cost funding base supporting NIM upside from rising rates.

Y-o-y non-interest income declined largely from a high base effect of 1Q21 fee income. Recall strong wealth management contributions from buoyant market conditions then. Pervasive macro uncertainty could likely keep wealth fees subdued in the near term, but operational fees from loans, transactions as well as credit cards should see upside as regional economies re-open, we believe.
Trading income disappointed the most for UOB from hedging impacts on their credit holdings as well as mark-to-market losses on equities. Management expects a turnaround in subsequent quarters, but we have lowered 2022-24E non-interest income by 5-6%. For DBS and OCBC trading income held up better than expected.

All 3 banks saw NII improving y-o-y and q-o-q. Loan growth at 8-9% y-o-y is robust, pointing to regional recovery. A slower North Asia remains an overhang, but policy support for economic growth in China is an upside risk.
Similarly, re-opening of South East Asia and gathering pace of North-South supply chain relocations should support loan growth going forward, in our view.
For the first time in four quarters, all 3 banks saw NIMs improving q-o-q. Rising rates should provide asset-repricing upside across the portfolio, especially with 56-76% of deposits in CASA. Further, 20-25% of loans are in US$ – largely funded by US$ CASA. This means Fed rate hikes should directly flow through to improving spreads here.

Non-performing loan (NPL) ratios largely fell y-o-y, pointing to improving conditions and rising loan growth. q-o-q specific provisions fell for UOB and OCBC. General provisions also saw declines, but not as much as previous quarters and with lesser write-backs. These point to higher levels of caution given the potential for second/third order impacts on portfolios from geo-politics, inflation, commodity volatility and macro uncertainty.
We expect the pace of write-backs to slow going forward, even while asset quality is improving. We have raised DBS's 2022-24E credit charges by 6-9bps to reflect lower write-backs. Nevertheless, for the sector, we forecast 2022E provision covers of 91-107%, giving significant buffer for uncertainty.
See

Thilan Wickramasinghe Maybank Research | https://www.maybank-ke.com.sg/ 2022-04-29

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