Provisions will stay high across Singapore’s banks as they face net interest margin (NIM) compression and see non-performing loans rise amid low interest rates, say analysts. The reports come as the three banks posted declines in earnings of between 22% and 40% y-o-y for 2Q2020. 

For the 2Q20 ended June, DBS Group Holdings saw its profits declining 22% y-o-y to $1.25 billion, while UOB reported a 40% y-o-y fall in earnings to $703 million for the latest quarter. Similarly, OCBC’s net profit fell 40% y-o-y to $730 million for the quarter.

See: DBS's 2Q20 results, UOB's 2Q20 results, and OCBC's 2Q20 results

In line with calls made by the Monetary Authority of Singapore (MAS), the banks have lowered their interim dividends for the quarter: DBS to 18 cents per share from 33 cents last quarter, UOB to 39 cents from 55 cents previously, and OCBC to 15.9 cents from 25 cents from a year ago.

CGS-CIMB analysts Andrea Choong and Lim Siew Khee note that DBS’s net profit was in line with CGS-CIMB’s forecast but beat consensus, while UOB’s net profit missed both forecasts. 

“The key difference between the two banks: DBS had stronger trading and investment gains (S$742m), +4% q-o-q; UOB missed on net interest margin (NIM) and credit costs,” they write in an Aug 6 report.

For UOB, 1H2020 net profit formed 52% of CGS-CIMB’s forecast and 51% of the consensus’ forecasts. NIMs fell 23bp in 2Q2020 as net interest income dipped 9% q-o-q. This comes on the back of the collapse in benchmark rates, says Choong.

2Q2020 could mark the bottom for NIM as DBS’s fell 24 basis points (bp)  and UOB, 23bp q-o-q, says Choong. That said, Choong projects positive share price performance for DBS on stronger-than-expected investment income. Conversely, UOB is forecasted to see weaker share price performance from the lower-than-expected earnings.

CGS-CIMB is recommending “hold” on all three banks with target prices of $18.80, $19.04, and $8.37, for DBS, UOB, and OCBC  respectively. It is also maintaining its “neutral” call on the sector.

RHB analyst Leng Seng Choon expects “weak earnings ahead” for DBS, although the bank’s capital remains adequate with a Common Equity Tier-1 (CET1) capital adequacy ratio (CAR) of 13.7%. 

“Given the asset quality uncertainties ahead, there are risks of provisioning being even higher than our revised forecasts,” Leng says.

Sharp NIM compression is a concern, adds Leng. “There were sharp cuts in interest rates globally, and DBS deployed excess deposits into lower-yielding assets. Management guided FY2020 NIM to be 1.6%, and we forecast a close 1.63% (cut from 1.75%). We assume FY2020 loan growth of 5%.”

Leng has lowered FY2020F forecasts by 5% and is maintaining “neutral” on DBS with a target price of $18.50.

On UOB, Leng highlights NIM squeeze due to lower inteon DBS with a rest rates, along with a 1% q-o-q growth in loans, and expects the conditions to continue. “These led to a 9% q-o-q decline for NII. Management guided for 2-3bps NIM widening (from 2Q2020 level) per quarter for 3Q2020 and 4Q2020 – due to lower cost of funds.”

“We forecast FY2020 NIM of 1.55% vs FY2019’s 1.78%. We forecast a mild FY2020 loan expansion of 4%,” notes Leng. As of Aug 6, RHB is maintaining its “neutral” call on UOB, with a target price of $18.80.

Similarly, Maybank analyst Thilan Wickramasinghe warns of “spill over risks” for UOB in the coming quarters, downgrading the bank to “hold” with a lowered target price of $20.79 from $22.42.

UOB faces risks of higher credit charges, says Wickramasinghe. “Pressure on NIMs and non-interest income in 2H2020 are likely to remain given low interest rates and slow easing of lockdowns in ASEAN.”

“Importantly, 16% of UOBs loan book is under moratoriums – a bulk of which are set to expire between 3Q2020 [and] 4Q2020. Mostly these are for SMEs and prolonged weak economic conditions may drive some to turn sour. This may drive higher credit charges in 2021E (and 2022E),” says Wickramasinghe.

Such a scenario may prompt MAS to extend the recently announced dividend caps to next year as well, he notes.

Additionally, UOB saw 2Q2020 ex-fee, non-interest income fall 11% y-o-y despite conducive market conditions. Fee income fell 15% y-o-y. While easing lockdown conditions may support growth here, it is unlikely to normalise in the near term, says Wickramasinghe. 

On the other hand, DBS Group is banking on franchise strength, he notes, as it is predominantly exposed to large corporates and MNC, which are “better equipped to ride out Covid-19 volatility”. Maybank is maintaining “buy” on DBS, with an increased target price of $22.90, up from $22.10.

“Loans under moratoriums make up just 5% of the book, pointing to lower stress amongst its customers. Also, a third of its loans are in North Asia, where growth is returning from earlier easing of lockdowns. While the MAS dividend caps will blunt payouts in the near term, Management claims they would aim to ramp up as soon as possible, given DBS’ strong capital reserves,” he says. 

With OCBC’s 1H2020 results announced a day after the two banks, OCBC Investment Research released a note on August 7. OCBC is recommending “buy” on both DBS and UOB, with cautious outlook ahead.

As at 4.00pm, shares in DBS are trading 22 cents higher, or 1.08% up, at $20.62, while shares in UOB are trading 13 cents lower, or 0.7% down, at $19.63. OCBC shares are trading 7 cents lower, or 0.8% down, at $8.73.