DBS GROUP HOLDINGS LTD (SGX:D05)
OVERSEA-CHINESE BANKING CORP (SGX:O39)
UNITED OVERSEAS BANK LTD (SGX:U11)
Singapore Banks 3Q22 Roundup - Surging NIM Supports Hikes For Dividends In 2023
- NIM for Singapore banks expanded by an accelerated pace, averaging 32bp q-o-q in 3Q22. While the sequential NIM expansion is expected to moderate starting 1H23, we still see NIM enhanced by about 40bp on a full-year basis in 2023.
- We expect DBS and OCBC to increase their 2023 dividends by 22% and 7% respectively to S$1.76 and S$0.60. DBS and OCBC provide 2023 dividend yields of 5.2% and 5.1% respectively.
- Maintain OVERWEIGHT. BUY OCBC (Target Price: S$18.28) and DBS (Target Price: S$45.00).
Singapore Banks 3Q22 Earnings
- DBS (SGX:D05), OCBC (SGX:O39) and UOB (SGX:U11)'s 3Q22 results exceeded our expectations. See
- DBS's announcement dated 03 Nov 2022.
- OCBC's announcement dated 04 Nov 2022.
- UOB's announcement dated 28 Oct 2022.
- Accelerated pace of NIM expansion. DBS, OCBC and UOB registered NIM expansion of 32bp, 35bp and 28bp q-o-q respectively in 3Q22. The US Fed hiked Fed Funds Rate by 50bp on 4 May 22 and 75bp on 15 Jun 22 with strong pass-through to higher domestic interest rates. Thus, DBS, OCBC and UOB were able to achieve strong growth in net interest income of 44%, 44% and 39% y-o-y respectively in 3Q22.
- Severe drop in fees from wealth management. Wealth management fees of DBS, OCBC and UOB declined by 13%, 40% and 34% y-o-y respectively in 3Q22. Trading volume has dwindled due to the weak investment climate. AUM was relatively stagnant due to a drop in market values despite the large inflow of new money driven by North Asia.
- UOB and OCBC registered growth in other non-interest income. UOB and DBS registered strong growth in other non-interest income of 66% and 32% y-o-y respectively. While the banks did not disclose a breakdown, we believe the surge was primarily driven by strong increase in customer flows for hedging of interest rates and forex exposures.
- Separately, OCBC clocked resilient income of S$318m from insurance (+21% y-o-y) due to net mark-to-market gains from assets and liabilities of insurance funds.
- Asset quality improves. NPL ratios have improved across the board for DBS (-0.1ppt q-o-q to 1.2%), OCBC (-0.1ppt q-o-q to 1.2%) and UOB (-0.2ppt q-o-q to 1.5%). DBS and UOB saw moderation in new NPL formation (DBS: S$278m and UOB: S$214m). The three banks also benefitted from strong upgrades and recoveries (DBS: S$411m, OCBC: S$669m and UOB: S$448m) after customers have exited loan relief programmes.
- General provisions provide cushion against external uncertainties. General provisions were 92bp, 90bp and 90bp of gross loans respectively for DBS, OCBC and UOB. DBS and UOB disclosed that their management overlays for general provisions were S$2.1b and S$1.4b respectively.
- Banks to reward shareholders with higher dividends in 2023. DBS expects its CET-1 CAR to jump to 16% when Basel 4 is implemented on 1 Jan 24, which provides a comfortable cushion of 2-3ppt above operating range of 12.5-13.5%. OCBC and UOB could see similar quantum of enhancement to their CET-1 CAR.
- DBS intends to review its dividend policy at end-22 with a view of hiking dividend in 2023. Likewise, we would look forward to higher dividend from OCBC in 2023 as well.
- See DBS's Dividend History, OCBC's Dividend History, UOB's Dividend History.
Fed Funds Rate likely to peak at a higher level.
- The FOMC has hiked the Fed Funds Rate by 75bp for the fourth consecutive time during its 2 Nov 22 meeting, bringing the Fed Funds Rate to 3.75%. Fed Chairman Jerome Powell warned that the Fed has “some ways to go” in its efforts to tame inflation. Recent strong economic numbers indicate that the “terminal level” of interest rates could be higher than previously anticipated. His comments suggest that the Fed might continue to raise the Fed Funds Rate in 1H23.
- Toning down the pace of rate hikes. In the latest FOMC statement, the Fed states that it will take into account the cumulative tightening implemented so far and the time lags before monetary policy starts to take effect. The Fed Funds Rate is already in restrictive territory and the pace of rate hikes could moderate to 50bp during the next FOMC meeting on 14 Dec 22. Fed officials who support a slower pace of rate hikes include Boston Fed President Susan Collins and Chicago Fed President Charles Evans. A slower pace of rate hikes gives the Fed more time to assess the cumulative impact from past rate hikes.
Brighter prospects for ASEAN countries.
- ASEAN countries benefit from easing of safe distancing measures and resumption of air travel. In particular, Malaysia and Indonesia gain from recovery in domestic consumption and higher energy and commodity prices. ASEAN countries benefit from the reorientation of supply chains.
- Many multinational companies have adopted the China + 1 strategy and have plans to set up alternative production facilities within the ASEAN region.
Maintain OVERWEIGHT on Singapore Banks
- 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.
- BUY DBS (Target price: S$45.00) and OCBC (Target price: S$18.28) for their 2023 dividend yields of 5.1% and 5.0% respectively.
- See also report:
Jonathan KOH CFA
UOB Kay Hian Research
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https://research.uobkayhian.com/
2022-11-13
SGX Stock
Analyst Report
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