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PhillipCapital, RHB disagree on forecast for banks' upcoming FY2023 results

Jovi Ho
Jovi Ho • 5 min read
PhillipCapital, RHB disagree on forecast for banks' upcoming FY2023 results
Analysts are divided on the upcoming results for FY2023 ended December from Singapore’s three banks, with recent reports from two brokerages here showing a sharp divergence in views. Photo: Bloomberg
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Analysts are divided on the upcoming results for FY2023 ended December from Singapore’s three banks, with recent reports from two brokerages here showing a sharp divergence in views. 

PhillipCapital Research analyst Glenn Thum is staying “overweight” on the sector. In a Jan 8 note, Thum says he remains positive on banks though net interest margins (NIMs) may see flat growth despite the higher-for-longer interest rate environment.

Instead, Thum thinks a recovery in loan growth and fee income will uplift profits, helping the three banks — DBS Group Holdings D05 -

, Oversea-Chinese Banking Corporation (OCBC) and United Overseas Bank U11 - (UOB) Limited — cap off a year of multiple quarterly record profits. 

“Bank dividend yields are also attractive with upside surprises due to excess capital ratios and a push towards higher returns on equity (ROEs),” he adds. 

Thum is staying “buy” on all three banks, with target prices of $41.60 for DBS, $14.96 for OCBC and $35.90 for UOB. 

Only DBS has announced its results release date so far; the bank will release its FY2023 results before the market opens on Feb 7. 

See also: Top HSBC shareholder Ping An exploring ways to cut US$13 bil stake

SGX is another “major beneficiary” of higher interest rates, adds Thum, and he stays “buy” with a target price of $11.71. 

Singapore interest rates dip slightly in December

Singapore interest rates dipped slightly in December, the first decline in 11 months. 

See also: ‘Not cheap’, ‘no value’ but market excited: OCBC’s GEH bid divides analysts

December’s three-month Singapore Overnight Rate Average (SORA) was down 2 basis points (bps) m-o-m to 3.74%, and was similar to the 4Q2023 average. 

Nonetheless, this was up 66 bps y-o-y and was similar to the 4Q2023 3M-SORA average of 3.74%.

Overall loans to Singapore residents fell by 2.89% y-o-y in November to $793 billion.

This was below Thum’s estimate of low-single-digit growth for 2023 as the rise in interest rates started to be fully felt by consumers. Nonetheless, this is the smallest decline recorded in 10 months. 

Meanwhile, business loans fell by 4.43% y-o-y in November. 

Loans to the building and construction segment, the single largest business segment, fell 0.29% y-o-y to $169 billion, while loans to the manufacturing segment fell 15.7% y-o-y in November to $21.9 billion. 

Consumer loans were down 0.4% y-o-y in November to $312 billion, as dips in other segments were offset slightly by strong loan demand in the housing segment. Housing loans, which make up about 70% of consumer lending, grew 1.42% y-o-y in November to $225 billion for the month. 

For more stories about where money flows, click here for Capital Section

Total deposits and balances grew by 4.35% yo-y in November to $1,794 billion. The Current Account and Savings Account, or CASA proportion, dipped slightly to 18.5% from 18.7% of total deposits, or $332 billion.

RHB more bearish

Compare this to RHB Bank Singapore’s forecast, which stays “neutral” on Singapore’s banks. 

“We keep our view that tailwinds for Singapore banks under our coverage are waning,” reads a Jan 5 report. “A peaking rate cycle, coupled with potential rate cuts in 2H2024, means that the sector’s earnings momentum is expected to stall in 2024.”

However, as long as the bottomline is elevated, this should be supportive of dividend yields, they add. 

OCBC Bank is RHB’s preferred pick. “It has the strongest asset quality metrics — a potential differentiating factor if interest rates stay higher-for-longer. Yet, the stock trades at 1x P/BV while offering 6% yield.”

RHB is staying “neutral” on all three banks with target prices of $34.70 for DBS, $13.65 for OCBC and $29.70 for UOB. 

Banks’ share prices went through a volatile 2023, starting off the year positively on higher interest rate environment before concerns over the health of banks in the US and Switzerland dampened performance, say RHB’s analysts.

Performance in 2H2023 was range bound, with the narrative shifting from weak China macroeconomic data to a higher-for-longer interest rate environment and ending the year with talks of lower rates and soft landing. 

This spurred a late rally in banks to end 2023 flat, according to RHB. “OCBC outperformed peers on superior asset quality with decent valuation and attractive dividend yield while UOB was a laggard due to uncertainties over its integration of the Citigroup acquisition, we believe.”

RHB’s economics and markets strategy team sees the Fed fed rate peaking at 5.25%-5.50%, before easing to 5.0%-5.25% by 2H2024.

As such, while RHB forecasts 2024 sector loans growth to be 5% vs 3% in 2023, the tradeoff is that expectations for sector NIM to be squeezed by 6 bps y-o-y, leaving 2024 net interest income (NII) flat y-o-y. 

Apart from policy rate cuts, other sources of NIM pressure could come from competition, focused on high-quality assets and deposit repricing. 

Similarly, RHB sees a mixed bag for the non-interest income outlook. Fee opportunities could improve from healthy credit card spending and a pickup in loan-related fees. 

Meanwhile, better market sentiment should also open up opportunities to redeploy the strong net new money inflows last year into wealth management products from fixed deposit placements, says RHB. 

“However, we think the robust treasury and markets income growth enjoyed last year may not be sustained,” says RHB. “As such, we expect 2024 non-II growth to slow to 4% from the expected 9% growth in 2023. All in, on the operating income front, we expect 2024 sector operating income growth of 2%.”

Meanwhile, credit costs may inch up but should be under control, says RHB. “We assume an uptick in credit cost to 20 bps from 17 bps in 2023. Singapore’s banks are keeping a watch on potential asset quality issues following the hike in interest rates but at this point, have not noted any systemic issues.”

Banks have been taking pre-emptive measures, such as downgrading collateral valuation and loan ratings, coupled with holding on to overlay buffers, says RHB.

Overall, RHB expects flattish 2024 earnings growth of 26% y-o-y. “In our view, the looming rate cut cycle will likely cap the upside potential to share prices. Flipside, we think the attractive dividend yields of 6%-7% will help provide downside support to share prices. Also, the sector currently trades at 1.06x 2024 P/BV, close to the 1.04x P/BV average during the 2016-2020 Fed fund rate cycle.”

As at 1.06pm, shares in DBS are trading flat at $32.85; while shares in OCBC are trading 8 cents higher, or 0.63% up, at $12.88; and shares in UOB are trading 19 cents higher, or 0.70% up, at $28.59. 

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