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Banks trend higher on higher NIM and earnings growth in 2022

Goola Warden
Goola Warden1/10/2022 12:11 PM GMT+08  • 5 min read
Banks trend higher on higher NIM and earnings growth in 2022
Banks have gained 5% to 7.9% since Jan 3 on expectations of higher NIMs and earnings
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DBS Group Holdings made a new all time high of $35 on Jan 10, albeit briefly. Year-to-date, the local banking behemoth is up 6.59%. Oversea-Chinese Banking Corp has rallied 5.96% since the start of the year, but at $12 (give or take), it is not at an all time high. Back in 2018, OCBC traded above $13.73. United Overseas Bank is up 7.95% since the start of the year. UOB has been ahead on various digital aspects, such as launching its digital bank UOB TMRW across Asean. It has also not written back any of its expected credit loss (ECL) 1 and 2 provisions leaving mutiple avenues to boost earnings.

All three local banks are likely to be beneficiaries of interest rate hikes which are set to take off this year, in an effort to stymie inflationary pressures. On Jan 5, the US Federal Reserve’s meeting minutes (the FOMC was held on Dec 13-14) pointed to a faster-than-expected rise in US interest rates due to concerns about persistent inflation. The guidance is for three rate hikes this year. The flow through is usually around 60% to 70% in terms of impact on Singapore’s interest rates, which are moving to Sora.

In a research note published on Jan 5, Macquarie Research (MQ) gave a summary of their views of how Singapore banks will perform as the rate cycle plays out. MQ is expectiing US rate hikes to start from 2Q2022. Some US economists are expecting a first rate hike in March. As a result of the increasingly hawkish outlook, MQ has upgraded Singapore banks’ earnings estimates by 0.4% to 4.7% for FY2022 and FY2023. Its top pick is UOB followed by DBS which is most sensitive to rate hikes.

“The Singapore banks have an average 6bps positive impact on Net Interest Margins (NIM), MQ estimates, over 12 months, in response to each 25bps US$ 3-month rate increase,” MQ says in its update.

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