A day ahead of the release of 3Q20 results by OCBC and DBS, PhillipCapital expects “lukewarm” results on Singapore’s three banks, citing a third consecutive month of shrinking loans and October interest rates remaining at the lowest since 2014. 

In a Nov 4 note, PhillipCapital research analyst Tay Wee Kuang is maintaining his ‘neutral’ call on the banking sector here, recommending ‘neutral’ on DBS with a target price of $21.00 and ‘accumulate’ on both OCBC and UOB, with target prices $8.92 and $20.40 respectively. 

Earlier that morning, UOB reported 40% lower 3Q20 net earnings of $668 million, shoring up $339 million of credit allowance for the quarter. Net earnings for the 9MFY2020 stood at $2.23 billion, 33% lower than the $3.34 billion reported a year ago. 

See: UOB reports 40% lower 3Q net earnings of $668 mil, shores up $339 mil of credit allowance for the quarter

“Lukewarm 3Q20 expected, with m-o-m improvements from better net interest margin (NIM) management following asset repricing and end of the circuit breaker,” notes Tay. 

Interest rates stayed low in 3Q20 (3M-SIBOR: 0.43%, 3M-SOR: 0.19%), with 3MSIBOR and 3M-SOR at 0.41% and 0.18% respectively in October. Tay adds that banks are likely to report flat NIMs in 3Q20 that will likely persist with low interest rates.

Loans contracted 1.03% y-o-y in September, as outstanding loans shrank for the seventh consecutive month. Business loans dipped 0.2% and consumer loans, 2.4% y-o-y. 

Month-on-month, however, consumer loans have started to recover, says Tay. They grew 0.3% in October, their third consecutive growth. All segments added loans, which helped stave off a bigger loan-book contraction. “As Singapore resumes economic activities, a turnaround in business loans could revert loan growth to healthier levels observed in 2019.”

Securities daily average value (SDAV) grew at its slowest 6% y-o-y since 2020. Top equity derivatives value also slipped 9% y-o-y, notes Tay. 

Similar weakness was observed for derivatives volumes, which retreated 8.7% y-o-y in October for the top five equity index futures contracts, namely the FTSE China A50 Index Futures, Nifty 50 Index Futures, MSCI Taiwan Index Futures, Nikkei 225 Index Futures and MSCI Singapore Index Futures.

This echoed the overall sluggish market as we enter the final quarter of 2020, notes Tay. That said, the recent spike in the volatility index, arising from uncertainty from the US election uncertainties and a global resurgence of Covid-19 cases may benefit derivatives as a risk-management tool, he adds. 

“Banks are likely to report lukewarm results in 3Q20, with a slight recovery from their lows in 2Q20 due to interest-rate shocks and the circuit breaker,” says Tay. 

For sector exposure, PhillipCapital prefers DBS, given its war chest of $1 billion in unrealised gains from fixed income assets that may be realised to offset top-line weakness. “The rate of recovery in non-interest income and updates of loans under moratorium will be key to watch for possible re-rating catalysts.”

As at 12.20pm, shares in DBS are trading 6 cents higher, or 0.28% up, at $21.49; while shares in OCBC are trading 8 cents higher, or 0.93% up, at $8.65; and shares in UOB are trading 34 cents higher, or 1.75% up, at $19.79.