UOB Kay Hian analyst Jonathan Koh remains positive on the Singapore banking sector amid the “exceptionally strong results” posted by DBS Group Holdings and Oversea-Chinese Banking Corporation (OCBC) during the 1QFY2021 ended March.

Koh has maintained “overweight” on the sector as the banks are slated to release their results for the 2QFY2021 ended June on Aug 4 and Aug 5 respectively.

Individually, Koh has estimated that DBS will post net profit of $1.535 billion for the 2QFY2021, up 23% y-o-y, but down 24% q-o-q.

“The sequential pullback was inevitable as 1QFY2021 was exceptionally strong due to solid wealth management fees of $519 million (+29% y-o-y and +50% q-o-q), doubling of net trading income y-o-y and write-back in general provisions of $190 million,” he writes in a July 19 report.

In the 2QFY2021, Koh also expects to see loan growth of 5.2% y-o-y and 2.0% q-o-q with broad-based growth from non-trade corporate loans, trade loans and residential mortgages.

DBS’s net interest margin (NIM) is expected to remain stable at 1.49%, he says.

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Total fees and commissions are also estimated to fall sequentially, specifically 11% q-o-q, albeit with a 24% y-o-y increase.

Koh notes that DBS’s wealth management fees fell 11% q-o-q attributable to protracted negotiations on President Biden’s infrastructure plan in the 1QFY2021 amid the buoyant sentiment due to the stimulus spending in the US.

On this, Koh expects the bank to see trade-related, transaction services and cards to improve on a y-o-y basis due to the low base from the Circuit Breaker period from April to June in 2020.

“We expect net trading income to moderate y-o-y and q-o-q to $320 million in 2QFY2021,” he writes.

In addition, he foresees credit costs for the bank to moderate to 23 basis points in the 2QFY2021, compared to the 90 basis points in the same period the year before.

For OCBC, Koh has estimated that the bank will post net profit of $1.198 billion for the 2QFY2021, up 64% y-o-y and down 20% q-o-q.

“The sequential pullback was inevitable as 1QFY2021 was exceptionally strong due to solid wealth management fees of $321 million (10% y-o-y and 28% q-o-q), strong net trading income of $316 million (+20% q-o-q), while insurance contributed $470 million (+199% y-o-y and +140% q-o-q) boosted by mark-to-market gains,” he notes.

Like DBS, Koh also expects OCBC’s NIM to remain stable at 1.56%.

Total fees and commissions for OCBC may decline 7% q-o-q, while improving by 24% y-o-y.

OCBC’s wealth management fees contracted by 14% q-o-q due to the Phase 2 (Heightened Alert) measures, which lasted from May 16 to June 13, which “affected the volume of customer interactions”, he notes.

During the 2QFY2021, Koh also expects contribution from OCBC’s insurance business, Great Eastern Holdings, to drop by half on a q-o-q basis to $220 million due to “normalisation without [the] huge mark-to-market gains” in the 1QFY2021.

For the period, he expects OCBC’s credit costs to be at 28 basis points compared to the 111 basis points in the 2QFY2020.

Looking forward, Koh foresees the easing of restrictions on dividends as both banks have strong Common Equity Tier-1 capital adequacy ratio (CET-1 CAR) of 14.3% and 15.5% for DBS and OCBC respectively.

The CET-1 CARs, says Koh, are “substantially higher” than that of their target range of 12.5% to 13.5%.

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On this, Koh expects DBS to pay a dividend of 25 cents per share for the 2QFY2021 and OCBC to pay 21.2 cents a share for the 1HFY2021 on the assumption that the Monetary Authority of Singapore (MAS) lifts its cap on dividends.

“We expect restrictions on dividends to be subsequently eradicated, paving the way for and DBS and OCBC to restore distributions per share (DPS) to pre-Covid-19 levels of $1.32 and 56 cents respectively for 2022,” writes Koh.

As at 2.49pm, shares in DBS are trading 1 cent lower or 0.03% down at $29.57, or 1.4 times P/B, according to UOB Kay Hian’s estimates.

Shares in OCBC are trading 5 cents lower or 0.4% down at $11.81, or 1.05 times P/B.

Photo: Bloomberg