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PhillipCapital stays 'overweight' on Singapore banks after rosy results

Jovi Ho
Jovi Ho3/9/2022 03:10 PM GMT+08  • 4 min read
PhillipCapital stays 'overweight' on Singapore banks after rosy results
“We remain positive on banks. Bank dividend yields are attractive with upside surprise due to excess capital ratios.”
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General provisions and excess capital ratios made the difference for Singapore banks in the final quarter of 2021, and shareholders were rewarded with attractive dividend yields, says PhillipCapital Research analyst Glenn Thum.

Improving economic conditions and rising interest rates remain tailwinds for the banking sector, adds Thum, who maintains “overweight” on the local banking sector.

In a March 8 note, Thum is maintaining “accumulate” on DBS Group Holdings and United Overseas Bank (UOB) with target prices of $41.60 and $35.70 respectively.

Meanwhile, Thum maintains “buy” on Oversea-Chinese Banking Corporation (OCBC) with a target price of $14.22.

Interest rates were up “modestly” in February by 7 basis points (bps) m-o-m, notes Thum. “The three-month swap offer rate (3M-SOR) was up 7bps m-o-m to 0.39% while the three-month Singapore interbank offered rate (3M-SIBOR) was up 1bp m-o-m to 0.45%. The 3M-SOR is 8bps higher than its 4QFY2021 average of 0.31% and has improved by 18bps y-o-y. The 3M-SIBOR is 1bp higher than its 4Q2021 average of 0.44% and has improved by 4bps y-o-y.”

Thum adds: “We remain positive on banks. Bank dividend yields are attractive with upside surprise due to excess capital ratios. Improving economic conditions and rising interest rates remain tailwinds for the banking sector. Singapore Exchange (SGX) is another beneficiary of higher interest rates.”

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Amongst the three Singapore banks, only DBS’s and OCBC’s earnings for the FY2021 ended December met Thum’s estimates. For DBS, higher fee income and strong loans growth offset lower net interest margins (NIMs), while OCBC’s higher net interest income mitigated the higher-than-expected allowances.

UOB’s earnings for the year missed Thum’s estimates by 6% due to lower-than-expected trading and investment income.

General provision writebacks saved the day

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DBS’ 4QFY2021 total allowances were significantly lower y-o-y but higher q-o-q due to a lower write-back in general provisions (GPs). Full-year allowances fell 98% y-o-y to $52 million due to repayments of weaker exposure, credit upgrades and transfers to non-performing assets resulting in general allowance write-backs during the year. Full-year credit cost of 12bps is below pre-pandemic levels. Management has guided similar allowances for FY2022.

OCBC made special provisions (SPs) of $387 million during the quarter, which is 109% higher than 3QFY2021’s SPs of $185 million. This increase was mainly driven by project financing delays due to supply chain disruption brought about by Covid-19.

However, OCBC was able to write back GPs of $70 million during the quarter mainly due to downgrade of accounts to ECL stage 3 allowances, and refresh of the macroeconomic variables in the ECL model. OCBC has guided credit costs of 20- 25bps for FY2022F compared with FY2021’s credit costs of 29bps.

UOB’s GP write-back of $76 million in 4QFY2021 resulted in full-year GPs reducing by 90% y-o-y to $95 million. Credit costs on allowances dropped by 8bps q-o-q to 12bps.

Full-year credit costs were lower by 37bps at 20bps as FY2020 included pre-emptive allowance for non-impaired loans. Total general allowance for loans were prudently maintained at 1% of performing loans. UOB has guided credit cost of 20-25bps for FY2022F due to lower SPs.

Outside of Singapore, Hong Kong’s domestic loans growth fell by 6.79% y-o-y but grew by 0.81% m-o-m in January. The y-o-y loans growth for January was the lowest recorded since 2010, however the MoM loans growth for January was the highest since June 2021.

Malaysia’s domestic loans growth saw an increase of 4.66% y-o-y in January and rose 0.53% m-o-m in January. The increase y-o-y in December was the highest recorded since March 2019.

As at 2.42pm, shares in DBS are trading 89 cents higher, or 2.85% up, at $32.12; while shares in UOB are trading $1.03 higher, or 3.64% up, at $29.30; and shares in OCBC are trading 15 cents higher, or 1.32% up, at $11.47.

Photo: Bloomberg

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