Expect higher funding costs and lower loan volumes at Singapore banks’ upcoming results for 1HFY2023 ended June, says Maybank Securities analyst Thilan Wickramasinghe.

While net interest income (NII) should continue to see y-o-y growth, Wickramasinghe expects the sequential deceleration seen in 1QFY2023 ended March to deepen, he writes in a July 18 note.

UOB is set to report its results on July 27, followed by DBS on Aug 3 and OCBC on Aug 4.

Wickramasinghe sees potential upside surprise from OCBC from better insurance income, while UOB may see downside risks for foreign exchange translation from the Asean markets.

According to the Maybank analysts, non-interest income could grow faster q-o-q from improved wealth management income as customers take on more risk in volatile markets. “While pre-provision operating profit (PPOP) should see positive momentum from better opex management, earnings are set to grow negatively q-o-q from higher provisioning.”

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The banks’ asset quality in 2QFY2023 likely remains benign, says Wickramasinghe, but he expects a more cautious tone in management guidance for the latter half of the year.

In 1QFY2023, sector NII saw a 2.7% q-o-q contraction, notes Wickramsinghe. Barring DBS, net interest margins (NIMs) fell between 1 and 4 basis points (bps) q-o-q as deposit pricing caught up with interest rate hikes and more competition.

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“We expect this trend to be more pronounced in 2QFY2023, with DBS likely the least affected given their large, low-cost liquidity base and potential safe haven flows during the US/Credit Suisse Crisis in end 1QFY2023,” he adds.

Wickramsinghe expects loans to be in “contraction mode” as well, with weak readings from North Asia, where China’s re-opening has so far been tepid.

Thailand, Malaysia may be brighter spots, he adds. However, a stronger Singdollar (up 3% compared to the ringgit and up 7% against the baht in 2Q2023) may offset gains.

Non-interest income, on the other hand, should see q-o-q improvements from recovering wealth management given increased market volatility, says Wickramsinghe. “Expectations of peaking interest rates could have driven clients to take on more risk. In 1QFY2023, wealth management expanded 30% q-o-q. Separately, 1QFY2023 opex was moderately lower to flat.”

Wickramsinghe expects cost discipline to be maintained in 2QFY2023, although employee costs could see slight q-o-q hikes as increments kick in. “Overall, PPOP momentum should be positive q-o-q.”

Non-performing loan (NPL) ratios fell or were flat q-o-q in 1QFY2023 despite macro pressure and slowing economic growth, notes Wickramsinghe. “We expect benign credit quality to persist in 2QFY2023, much like seen during the large US banks results last week. However, we would be watching for new NPL formation trends as well as pace of recoveries.”

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He expects increases in general provisioning amid high interest rates and tougher operating conditions. “Similarly, there are elevated risks of cautionary guidance from management in terms of asset quality and growth for 2HFY2023.”

That said, capital levels are high, with the average common equity tier-1 (CET-1) level at 15.5%, “and provisioning cover is good”.

As a result, Wickramsinghe sees potential for higher dividends, albeit only in 4QFY2023. “OCBC 2QFY2023 earnings per share could potentially surprise on upside from a better-than-expected mark-to-market recovery of their insurance business, while a stronger Singdollar and a weaker China could result in downside risks to UOB’s Asean and North Asia operations.”

As at 9.07am, shares in DBS are trading 28 cents higher, or 0.86% up, at $32.81; while shares in OCBC are trading 15 cents higher, or 1.20% up, at $12.62; and shares in UOB are trading 41 cents higher, or 1.48% up, at $28.10.

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Higher funding costs, lower loan volumes expected at local banks' 2QFY2023 results; Maybank prefers DBS

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