DBS GROUP HOLDINGS LTD (SGX:D05)
OVERSEA-CHINESE BANKING CORP (SGX:O39)
UNITED OVERSEAS BANK LTD (SGX:U11)
DBS & OCBC 3Q22 Results Preview - Series Of 75bp Hikes Propels Accelerated NIM Expansion
- The 3 SG local banks will be announcing their 3Q22 results:
- The Fed has accelerated the pace of rate hikes, leading to massive NIM expansion of 29bp for DBS and 20bp for OCBC in 3Q22. DBS and OCBC grew net interest income by a hefty 41% and 31% y-o-y respectively.
- We forecast net profit of S$2,012m for DBS (+18% y-o-y and +11% q-o-q) and S$1,417m for OCBC (+16% y-o-y and -4% q-o-q).
- BUY DBS (Target price: S$45.75) and OCBC (Target price: S$16.82) for 2023 dividend yields of 5.4% and 5.2% respectively. Maintain OVERWEIGHT.
DBS Group (SGX:D05) Earnings Preview
- We forecast DBS's net profit to grow 18% y-o-y and 11% q-o-q to S$2,012m in 3Q22. The strong growth was powered by accelerated NIM expansion.
- Strong pass-through boosted NIM expansion. We expect healthy loan growth of 5.8% y-o-y and 1.0% q-o-q, driven primarily by corporate loans in 3Q22. NIM expanded by a massive 29bp q-o-q to 1.87%. The US Fed hiked Fed Funds Rate by 50bp on 4 May 22 and 75bp on 15 Jun 22. There was strong pass-through to domestic interest rates with three-month compounded SORA and three-month SIBOR rising 121bp and 126bp q-o-q respectively to 1.97% and 3.17% in 3Q22. Net interest income grew by a hefty 41% y-o-y.
- Fees & commission declined 12% y-o-y. Contribution from wealth management held steady at S$335m despite chopping financial markets and heightened risk aversion. Fees from transaction services are expected to be stable. Contribution from cards increased 12% y-o-y due to resumption of business and leisure travel.
- Non-interest income lower y-o-y due to high base. We expect other non-interest income to decline 19% y-o-y in 3Q22. Both net trading income and gains from investment securities are expected to be lower compared to last year.
- We expect operating expenses to increase 4.2% y-o-y and cost-to-income ratio at 41.3%.
- Asset quality remains benign. We expect NPL ratio to be stable at 1.3%. DBS has ample management overlay for general provisions of S$1.8b set aside previously due to the COVID-19 pandemic. We expect DBS to top up general provisions in 3Q22 due to deterioration in macroeconomic variables and the uncertain economic outlook. We expect credit cost of 16p in 3Q22, higher than 5bp in 1H22.
- We expect DBS to maintain quarterly dividend at 36 cents for 3Q22.
- Our target price of S$45.75 for DBS is based on 1.94x 2023F P/B, derived from Gordon growth model (ROE: 16.0%, COE: 8.5%, Growth: 1.5%).
OCBC Bank (SGX:O39) Earnings Preview
- We forecast OCBC's net profit of S$1,417m for 3Q22, representing growth of 16% y-o-y but a strong growth was powered by accelerated NIM expansion.
- On track to achieve mid-single digit loan growth. We expect loan growth of 5.4% y-o-y and 0.8% q-o-q in 3Q22, driven mainly by network customers expanding overseas to acquire logistics, data centre and student accommodation properties and sustainable finance. We expect NIM to expand by 20bp q-o-q to 1.91%. Net interest income grew by a massive 31% y-o-y.
- Fees affected by weakness in financial turmoil and economic slowdown. We expect fee income to drop 13% y-o-y in 3Q22. Contribution from wealth management is expected to decline 23% y-o-y as investors’ risk appetite was affected by the Russia-Ukraine war. Loans & trade related fees are expected to drop 11% y-o-y. We expect contributions from insurance to be stable at S$300m. Bond markets were in the doldrums with 10-year government bond yield rising 50bp to 3.48% in Singapore and 11bp to 4.41% in Malaysia. We also expect net trading income to be healthy at S$180m.
- Asset quality remains stable. We expect NPL ratio to be stable at 1.3%. 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 have factored in higher credit costs of 20bp in 3Q22 (1H22: 7bp), in line with management’s guidance of credit costs at 20-25bp for 2022.
- Our target price of S$16.82 for OCBC is based on 1.34x 2023F P/B, derived from the Gordon growth model (ROE: 11.2%, COE: 8.5%, Growth: 0.5%).
Ferocious rate hikes almost reaching a climax.
- The Fed has maintained its disciplined and hawkish stance, hiking the Fed Funds Rate by a third consecutive 75bp to 3.00% after the FOMC meeting on 21 Sep 22. Based on the Fed’s dot plot, the median projected path for Fed Funds Rate would hit 4.4% by end-22 and 4.6% by end-23. The projection is expected to lead to continued steep rate hikes on of 75bp on 2 Nov 22 and 50bp on 14 Dec 22, bringing the Fed Funds Rate to 4.25% by end-22. The rate hikes are front-loaded in 2022 and the intensity of rate hikes is expected to be modest in 2023.
- Anticipating pain but striving to engineer a soft landing. The Fed is concerned that inflation remains elevated, driven by imbalances between demand and supply. It prioritises quelling inflation and has promised to “keep at it until the job is done.” Based on economic projections submitted by FOMC participants, US GDP growth is expected to slow to 1.2% and unemployment rate should rise to 4.4% in 2023.
Maintain OVERWEIGHT on Singapore Banking Sector
- Banks benefit from NIM expansion as liquidity is tightened due to higher interest rates and QT. The Russia-Ukraine war exacerbates higher inflation, which could keep bond yields higher for longer. DBS is the most sensitive to higher interest rates. OCBC and UOB benefit from reorientation of supply chains towards ASEAN countries.
- BUY DBS (Target price: S$45.75) and OCBC (Target price: S$16.82) for their 2023 dividend yields of 5.4% and 5.2% respectively.
Sector Catalysts:
- NIM expansion in 2022 and 2023, driven by upcycle in interest rates.
- Economic recovery driven by reopening and easing of COVID-19 restrictions.
- Banks pay more dividends as risks emanating from COVID-19 pandemic recede.
Assumption Changes
- We raised our DBS earnings forecast for 2023 by 4.7% due to steep hikes in interest the resultant positive impact of NIM expansion.
Sector Risks:
- Escalation of the Russia-Ukraine war beyond Ukraine.
- Geopolitical tension and trade conflict between the US, China and Russia.
Jonathan KOH CFA
UOB Kay Hian Research
|
https://research.uobkayhian.com/
2022-10-25
SGX Stock
Analyst Report
45.75
UP
43.600
16.82
UP
16.180
99998.000
SAME
99998.000
