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RHB stays ‘neutral’ on Singapore banks as sector braces for tougher times ahead, names DBS as top pick

Khairani Afifi Noordin
Khairani Afifi Noordin • 3 min read
RHB stays ‘neutral’ on Singapore banks as sector braces for tougher times ahead, names DBS as top pick
Income growth could be a challenge amid elevated rates, the analysts highlight. Photo: Bloomberg
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RHB Bank Singapore has kept “neutral” on Singapore banks with DBS Bank as its top pick as the sector braces for tougher times ahead. 

Amid a scenario of flattish earnings as the interest rate cycle turns, DBS’ commitment to increase distribution per share (DPS) by 24 cents per annum means its absolute DPS will continue to grow, the analysts highlight. As such, investors will have a good line of sight of its trajectory. 

They note that DBS expects to sustain this commitment over the next two to three years, while reduced rates leverage and ample general provision buffers are added bonuses. The analysts had upgraded DBS to “buy” from neutral on its dividend commitment after its FY2023 ended December results release.

For 4QFY2023, the Singapore bank sector operating income was down 3% q-o-q as net interest income (NII) dipped slightly on the net interest margin (NIM) squeeze. Meanwhile, non-interest income (non-II) softened 9% q-o-q due to a combination of seasonality and lower treasury and markets as well as insurance contributions. 

Operating expense (opex) rose 5% q-o-q on factors such as DBS’s full quarter consolidation of Citi Taiwan, corporate social responsibility (CSR) costs and one-off technology spending. Consequently, the sector’s cost to income ratio (CIR) rose to 44.8% versus 3QFY2023’s 41.1%. 

On the flip side, total allowances were down 22% q-o-q as asset quality was relatively benign. Hence, 4QFY2023 sector net profit was down by 8% q-o-q, the analysts note. 

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For the full year, the sector’s net profit jumped 25% y-o-y on stronger NII and non-II. CIR improved to 41.5% from 43.7% in FY2022, but these were partly offset by higher credit cost of 20 basis points due to specific allowances (SP) for some isolated incidences and lower general allowance (GP) writebacks. 

For FY2024, both DBS and OCBC Bank broadly retained their outlook. United Overseas Bank U11 -

(UOB), on the other hand, cut its 2024 guidance for loan growth to a single digit and NIM to 2% from 2.1% previously. “To be fair, UOB was also the earliest to report 3QFY2023 results,” the analysts point out.

Amid elevated rates, income growth could be a challenge, RHB says. Loan growth will likely stay soft, while wealth opportunities could be muted.

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Singapore banks are expecting four to five interest rate cuts in 2HFY2024, maintaining that the impact on NIM would be cushioned by improved loan growth and wealth opportunities. The analysts point out that UOB appeared relatively more bearish on near-term NIM, principally as its strategy to stay defensive would be a drag on NIM. 

“On asset quality, the banks have not noticed anything systemic and highlighted that they have sufficient GP in the book to help cushion against higher-than expected SP. Nevertheless, the higher credit cost Singapore banks had guided for in 2024 reflects an element of conservatism,” RHB analysts say.

Following the release of Singapore banks’ results, RHB has lowered its sector FY2024 and FY2025 patmi estimates by 2% and 4% respectively. This is mainly on NIM assumptions, cushioned by a more optimistic fee income outlook. 

The analysts continue to expect the sector’s bottomline growth to stall in 2024, where they see a slight dip in FY2024 patmi versus the 25% y-o-y growth in 2023. This is mainly due to a 6 basis points NIM squeeze expected, which is broadly in line with the guidance from banks. 

“Apart from that, we have pencilled in a 2 basis points uptick in sector credit cost to 22 basis points. In mitigation, we have assumed 2024 loan growth of 3%-4% and 4% non-II growth, mainly underpinned by better fee income,” they add.

As at 10.21am, shares in DBS, OCBC and UOB are trading at $33.59, $13.20 and $28.25 respectively. 

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