UOB Kay Hian analyst Jonathan Koh has maintained his “overweight” rating on the Singapore banking sector despite moderating net interest margin (NIM) expansion.

For DBS, UOBKH forecasts that the bank would report net profit growth of 36% y-o-y to $2.44 billion in 1QFY2023. This is driven by NIM expansion on a y-o-y basis, cost discipline and benign credit costs.

Koh expects DBS to announce muted loan growth of 3.2% y-o-y in 1QFY2023, driven by non-trade corporate loans. Residential mortgages are also forecast to be held back by customer repayments triggered by higher interest rates, he adds.

DBS’s NIM is expected to expand by a significant 64 basis points (bps) and 5 bps q-o-q to 2.1%. However, the pace of NIM expansion on a sequential basis would have moderated, as cost of deposits have creeped up due to competition for fixed deposits. Koh expects the bank to report a net interest income (NII) growth of 54% y-o-y on the back of a previous low base.

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The bank’s non-performing loan (NPL) is expected to be benign, with a stable NPL ratio at 1.1%. Koh points out that the bank has accumulated ample management overlay for general provisions of $2 billion set aside previously during the Covid-19 pandemic.

“Thus, we expect total provisions of $131 million and credit cost of 12 bps in 1QFY2023, which is at the lower end of management’s guidance,” Koh says, adding that he expects DBS to maintain its quarterly dividend at 42 cents for the quarter.

Meanwhile, UOBKH forecasts OCBC to report net profit of $1.7 billion for 1QFY2023, representing a 26% y-o-y growth. Aside from NIM expansion, the growth is also driven by sequential rebound in wealth management and normalisation in contributions from its insurance segment.

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OCBC’s loan growth is expected to be muted at 1.4% y-o-y in 1QFY2023 as corporate customers are cautious on business expansion. UOHKH forecasts the bank’s NIM to expand by 76 bps y-o-y but flat q-o-q to 2.31% due to higher cost of deposits. NII, on the other hand, is expected to grow by a massive 57% y-o-y due to a previous low base.

Koh expects OCBC to report a stable NPL ratio at 1.2%. General provisions are expected to moderate, as OCBC has already completed the review of its macroeconomic variable model in 4QFY2022.

Koh has “buy” calls on DBS and OCBC, with target prices of $41.80 and $16.80 respectively. OCBC is UOBKH’s top pick due to its dividend policy, expecting a 5.8% 2023 dividend yield.

As at 12.29pm, shares in DBS and OCBC are trading at $32.66 and $12.81 respectively.

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