Although the banks’ interest rates in November were at their lowest since 2014, sentiment towards the sector here is slowly improving, notes PhillipCapital analyst Tay Wee Kuang in a Dec 7 note. 

Tay is maintaining “neutral” on the banking sector here, with the same call maintained on DBS with a target price of $22.60. Meanwhile, Tay downgraded both Oversea-Chinese Banking Corporation (OCBC) and United Overseas Bank (UOB) to “neutral” with target prices $9.68 and $21.10 respectively. 

“While the credit outlook has improved for banks, we believe that an earnings recovery to pre-Covid-19 levels will only be further down the road, in FY2022,” he notes. 

Across the board, banks turned in soft 3QFY2020 results last month but reported greater asset-quality clarity. The improved credit outlook will pave the way for gradual earnings recovery, he adds.

See: MAS awards digital bank licences to two consortiums, two entities


Loans shrank 2% y-o-y in October, the weakest since August 2016, reinforcing their weak outlook. “Business loans were down 1.96% y-o-y, with outstanding loans shrinking for the eighth consecutive month. Consumer loans fell 2.06%, though they grew 0.4% m-o-m in their fourth consecutive month of growth,” says Tay.

Net interest margins (NIMs) fell in 3QFY2020 on subdued interest rates, dropping 4bps q-o-q to 1.53% on low interest rates in 3QFY2020. “We expect NIMs to stay at this level in 4QFY2020, which would work out to a full-year average of 1.60%,” writes Tay.

Allowances stayed high as banks continued to build reserves for potential non-performing loan (NPL) formation in FY2021. This was in preparation for the end of Singapore’s loan moratoriums next year, says Tay. “All three banks remained ahead of schedule in their reserve build-up, accumulating 31-52% of expected credit costs by 3QFY2020.”

See also: Banks expand digital solutions for businesses and consumers


Following Phase 1 expiry of loan moratoriums in Malaysia in October, interest payments for most of OCBC’s and UOB’s loans have resumed in Malaysia. Loans under moratorium fell to 5% from 9% of OCBC’s loan book and from 16% to 10% of UOB’s. 

Loans under moratorium for DBS remained at around 5% as it has no loan exposure to Malaysia. 

Better clarity on asset quality allowed UOB to lower its credit-cost outlook to 30-40bps from 50-60bps for FY2021, says Tay. OCBC expects credit costs to come in at the lower end of its 100-130bp guidance for FY2020 and FY2021. DBS maintains its 80-130bp range for the two years.

Digital banks

On the recent announcement of four digital banks in Singapore, Tay does not expect any impact on banks’ earnings until FY2022 when the digital banks start to operate.

Four licences were awarded, two digital full banks (DFB) and two digital wholesale banks (DWB). This was one less than the total five – two DFB and three DWB – that MAS was willing to issue. 

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The successful DWBs were deemed to be demonstrably stronger across the selection criteria. MAS may grant more DWB licences in the future, notes Tay. 

The winners of the two DFB licences were the Grab-Singtel consortium and SEA Group. Winners of the two DWB licenses were a wholly-owned entity of Ant Group and a consortium comprising Greenland Financial Holdings, Linklogis Hong Kong, and Beijing Co-operative Equity Investment Fund Management. 

“All digital banks are expected to begin operations in 2022. Till then, we do not foresee any material impact on the three banks’ earnings. We believe the three have a head start in the digitalisation race. We also expect the digital entrants to face a challenging operating environment in a well-banked society,” says Tay.

Top pick

For sector exposure, Tay prefers as lower credit costs guided by the bank should lift pressure off its earnings faster than for its peers.

As at 12.09pm, shares in DBS are trading at 21 cents lower, or 0.83% down, at $25.05; while shares in OCBC are trading 5 cents lower, or 0.50% down, at $9.93; and shares in UOB are trading 18 cents lower, or 0.79% down, at $22.49.