SINGAPORE (July 21): The effect of regional lockdowns and economic downgrades are expected to surface among Singapore banks with significant drops in interest rates driving negative pressure on net interest margins (NIMs), though trading may be “a possible bright spot”, says Maybank analyst Thilan Wickramasinghe. 

While Wickramasinghe remains “positive” on the outlook of Singapore banks, he has given “buy” calls to DBS Group and UOB with target prices of $22.10 and $22.42 respectively, and “hold” on OCBC with a target price of $9.1467.

“OCBC has the highest likelihood of surprising on the upside, while UOB may surprise on the downside from weaker margins,” says Wickramasinghe. DBS and UOB will be reporting their 1H2020 results on Aug 6, while OCBC will do so a day later. 

In addition, Wickramasinghe expects provisions to be largely cautionary. “Provisioning costs should see material q-o-q momentum as the brunt of regional lockdowns and economic downgrades manifest.”

Even before the Covid-19 outbreak, Singapore's three main lenders, DBS Group Holdings, Oversea-Chinese Banking Corp and United Overseas Bank had presented muted forecasts. In April, Moody’s downgraded the outlook for Singapore’s banking sector to “negative” from “stable”. 

While 1Q2020 credit charges increased four times q-o-q, gross non-performing loans (NPL) rose 7 base points (bps) – pointing to provisions being mostly cautionary. “In 2Q2020, we expect q-o-q elevated credit charges – most may remain cautionary adjustments to macro-economic variables (MEVs) as seen by the US banks results in the past two weeks,” notes Wickramasinghe. 

Lockdown driven NPLs are likely to pick up pace especially in Covid-19 frontline sectors, he adds. “We will be looking for clarity on the impact from regional fiscal and monetary support schemes and potential signs of recovery from easing lockdowns in 2H2020.”

On loans, Singapore Interbank Offered Rates (SIBOR) fell 46bps and HIBOR (Hong Kong Interbank Offered Rate) is down 115bps in 2Q2020. 

In 2Q2020, despite active lowering of funding costs and higher deposit growth, expect NIMs to see material downside, says Wickramasinghe. This follows the first quarter, where NIMs fell 3bps y-o-y following a smaller drop in benchmark rates, with loan pricing resilience helped by companies bulking up on liquidity.

Weak loan volumes, a result of large segments of regional economies being shut due to lockdowns, may further increase negative interest income momentum, he says. “UOB has the highest potential to surprise on the downside given their cautious track record of NIM management, with limited gapping activity.”

Trading presents a rosier picture. “Stronger equity markets and lower interest rates may provide a boost to trading income and mark-to-market gains – as demonstrated by the US banks in 2Q2020,” he notes. 

Additionally, smaller loan volumes, lockdown impacted credit card fees and weak wealth management may impact fee momentum. “With better trading and insurance performance, OCBC – where 20% of total income comes from these sources – may surprise on the upside, we believe. Overall, despite weaker income, we expect CIRs to remain largely stable helped by government wage support schemes.”

As at 5.17pm, shares at DBS, UOB, and OCBC were changing hands at $21.40, $20.70, and $9.21 respectively.