Continue reading this on our app for a better experience

Open in App
Home Capital Broker's Calls

Singapore banks could see upcoming moderation in growth momentum in 2023: IG Asia

Felicia Tan
Felicia Tan • 4 min read
Singapore banks could see upcoming moderation in growth momentum in 2023: IG Asia
DBS, OCBC and UOB will announce their earnings for the 4QFY2022 on Feb 13, Feb 24, and Feb 23. Photo: Bloomberg
Font Resizer
Share to Whatsapp
Share to Facebook
Share to LinkedIn
Scroll to top
Follow us on Facebook and join our Telegram channel for the latest updates.

Singapore’s three banks, DBS Group Holdings, Oversea-Chinese Banking Corporation (OCBC) and United Overseas Bank (UOB) may see yet another quarter of expansion in their net interest margins (NIMs) in the 4QFY2022 ended December, says IG Asia’s market strategist Yeap Jun Rong ahead of the banks' results reporting for the 4QFY2022 and FY2022.

DBS will be the first to do so on Feb 13, to be followed by UOB will follow on Feb 23 while OCBC will round up the trio on Feb 24.

“Previous guidance from our local banks has laid the ground for their net interest income (NII) portion to benefit from the rising interest rate environment, with DBS the clear forerunner in being the most sensitive to rate increases,” Yeap writes in his report dated Feb 3.

However, as the US Federal Reserve (US Fed) looks to slow its rate hikes, Yeap sees that it could bring about an upcoming moderation in the banks’ growth momentum in 2023. This, he adds, could be further pressured by an upward revision in funding costs.

Moderation in loan demand

For the banks’ 4QFY2022 results, Yeap foresees a moderation in loan demand playing out during the quarter.

See also: Drone incident has ‘negligible impact’ on ISOTeam, says SAC Capital

“Based on Singapore’s bank lending data, the demand for loans and advances has shown a clear moderation in 4QFY2022 as businesses and consumers adjusted to higher lending costs,” he writes.

“The October-December period has marked three consecutive quarters of month-on-month declines and while the latter half of the quarter saw a lesser extent of contraction, the uncertain global economic outlook could still bring the risks of further moderation in loan demand. China’s reopening narrative may be looked upon to provide some cushion, but recovery on that front may be more gradual than swift,” he adds.

In addition, any rise in the banks’ non-performing loan (NPL) ratio, which stood resilient in the 3QFY2022, will “remain on watch” with higher debt costs continuing to challenge economic conditions during the period for the 4QFY2022.

See also: Citi and DBS upbeat on Digital Core REIT as demand for data centres in key markets remains robust

The way Yeap sees it, “this could bring about a higher-than-expected rise in loan losses provision, which could come at an expense of reported earnings”.

“The pocket of optimism is that our local banks have been prudent in reversing any provisions since the Covid-19 pandemic, leading to more limited build-ups required ahead,” he notes.

Non-interest income to remain muted for the time being

During the 4QFY2022, the market strategist sees a “still-cautious risk environment” as driving muted interest in wealth management products.

That said, he notes that a potential recovery is present in 2023 on the back of improving sentiments since January.

"For now, the VIX [Index] has struggled to stay above the key 20 level, which points towards optimism in the US markets. On another note, China’s reopening shift has also lifted confidence across the region, with the strong consensus that the worst is over,” says Yeap.

“However, this will have to be balanced with a sharp slowdown in consumer spending and hence, spending in card fees,” he adds. “The banks’ outlook will once again be in focus here. Previous quarter’s releases were still met with signs of optimism in management’s outlook commentaries, with one to watch if similar optimism can likewise be presented in the upcoming results.”

For more stories about where money flows, click here for Capital Section

The Singapore Exchange (SGX) fund flow data noted a pause in institutional fund inflows into the fund sector in the recent months, from the net inflows prior since July 2022.

To Yeap, this “seems to point to some slight paring of exposure into the upcoming earnings, coupled with the aftermath of the recent Federal Open Market Committee (FOMC) meeting prompting a sell-off in the local banks on softer rate hike bets.”

“Current dividend yield for all three banks is hovering around the 4.1%-4.4% range, which could find traction as a dividend play on further downside, as Singapore’s 10-year risk-free rate has moderated from its October peak to hover around 2.9%,” he writes.

Year-to-date, DBS and OCBC’s share price performances have been largely trading in line with the benchmark Straits Times Index (STI) in the new trading year. DBS has been up by 5.5% while OCBC has been up by 6.2%.

UOB, on the other hand, has underperformed at -3.0%, although it comes on the back of stronger gains since October 2022, which partly accounts for the recent divergence in its performance.

“Much will depend on the upcoming earnings releases to determine if a retest of their respective 2022 highs can be in sight,” says Yeap.

Click here to read the full report which also includes Yeap's technical analysis

As at 1.37pm, shares in DBS, OCBC and UOB are trading at $36.18, $13.11 and $30.76 respectively.

Loading next article...
The Edge Singapore
Download The Edge Singapore App
Google playApple store play
Keep updated
Follow our social media
© 2024 The Edge Publishing Pte Ltd. All rights reserved.