SINGAPORE (Dec 23): RHB Group Research is maintaining the three local banks -- DBS Group Holdings, UOB and Oversea-Chinese Banking Corp -- at “neutral” after their combined net profit is expected to come in flat y-o-y while net interest income (NII) growth is expected to be flattish too, given guidance from the banks of net interest margin (NIM) pressure and soft loan growth.

In a Dec 19 report, analyst Leng Seng Choon expects 2020 loan growth to average 3.5% y-o-y for the three banks and estimates NIM to narrow by 4-7bps – factoring in a falling Sibor and competitive home mortgage rates, which "will cut lending yields for the banks", says Leng.

In 3QFY2019 ended Sept, loan growth for the three local banks averaged 5% y-o-y as business loans growth offset home mortgage weakness.

The banks have each guided for mid-single-digit 2020 loan growth, reflecting their outlook on global economic uncertainties.

Meanwhile, Leng is optimistic that the wealth management segment should continue to expand through 2020, mainly due to growing franchises and the inflow of foreign funds, especially from China.

All the three banks reported 3Q19 wealth management fee strength, with y-o-y growth rates of 11-38%.

Leng notes one of the factors that could affect the performance of the three banks is the progress of the US-China trade war. And if the trade war is resolved smoothly within a short time frame, he believes there will be a stronger economic growth for Singapore, which means banks could see a sharp increase in earnings.

Conversely, if the US-China trade war worsens, weakening global growth could increase non-performing assets of the banks.

RHB’s top “buy” pick in the sector is UOB despite expectations of flat earnings in 2020 as the bank has the smallest percentage of loan exposure to China at 16%. In comparison, DBS has the highest of 30%.

The research house has a target price of $29.50 for UOB.

See: UOB registers 8% higher net earnings of $1.12 bil in 3Q

“We believe lower exposure to China minimises asset quality risks at this juncture,” says Leng, who has “neutral” calls on DBS and OCBC.

As at 2.35pm, shares in UOB are trading at $26.32 while shares in DBS and OCBC are trading at $25.89 and $10.95 respectively.