Analysts from UOB Kay Hian Research and DBS Group Research are expecting Singapore banks to report strong earnings recovery for the 1QFY2021 ending March when results are reported in the coming weeks.
UOB Kay Hian analyst Jonathan Koh maintains his ‘overweight’ rating for the sector in a research report dated April 20.
He forecasts DBS Bank's net profit for the1QFY2021 to grow 22.3% y-o-y and 40.7% q-o-q to $1.42 billion. For the Oversea-Chinese Banking Corporation (OCBC), he expects net profit to grow 68.6% y-o-y and 3.9% q-o-q to $1.2 billion.
DBS analyst Lim Rui Wen agrees that banks will continue to show earnings recovery in 1Q extending through the year. She forecasts a 23% y-o-y earnings recovery across Singapore banks for FY2021.
The analysts cite stable net interest margins (NIM), higher non-interest income, loan growth, and lower credit costs as driving factors for the banks’ performance.
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Koh expects NIM for both banks to remain stable, forecasting 1QFY2021 NIM of 1.48% and 1.55% for DBS and OCBC respectively. Lim agrees that NIM will continue to be supported in light of the move by the banks to cut interest rates on basic tier flagship accounts at the start of the year.
The stable NIM should drive net income interest as loans grow for the period driven by the recovering economy and stronger lending activities.
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“We believe Singapore banks are on track to meet their FY2021 guidance, as credit demand continues to recover. Bright spots for loan growth include mortgages, loans arising from trade diversification investments, sustainability-related loans, battery and chip supply chains, amongst other corporate loans,” says Lim in an April 19 report.
Both analysts anticipate stronger non-interest income for the banks, driven by increased fees and commissions from trading, wealth management, and investment banking-related activities as the economy recovers.
In addition, they view that the expiry of the loan moratorium has stabilised the banks’ asset quality. As of end-January, loans under moratorium stood at 1% for DBS and 2% for OCBC. For UOB, loans under relief (which are 90% collateralised and supported by government relief measures) made up 6% of its loan book.
The improving asset quality is expected to translate to lower credit costs, with lower provisions recognised by the banks in FY2021.
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Koh and Lim also anticipate better FY2021 dividends from the banks as dividend caps are gradually relaxed. Both analysts predict a two-stage process with dividend payouts incrementally boosted between FY2021 and FY2022 back to pre-Covid levels.
Koh maintains ‘buy’ ratings for both DBS and OCBC with target prices of $29.02 and $11.96 respectively, while UOB is unrated.
Lim maintains ‘buy’ ratings on UOB and OCBC with target prices of $29.20 and $13.60 respective, while DBS is unrated.
Shares in DBS, OCBC and UOB closed at $29.02, $11.92 and $26.27 respectively on April 20.