Based on the results of the local banks recently released, DBS Group Holdings’ 2QFY2023 ended June results exceeded the expectations of analysts.

DBS announced a net profit of $2.63 billion, up 45% y-o-y and 2% q-o-q. Oversea-Chinese Banking Corp (OCBC) reported a net profit of $$1.71 billion, up 34% y-o-y and down 9% q-o-q. United Overseas Bank (UOB) announced a net profit of $1.57 billion, up 35% y-o-y but down 4% q-o-q.

Both the net profits of OCBC and UOB came in more or less within expectations. These two banks also reported higher credit costs but say these are idiosyncratic rather than systemic.

Net interest income continued to rise by hefty amounts y-o-y for all three banks. In q-o-q terms though, the gains were in the low single-digits.

OCBC announced the highest quarter net interest margin (NIM) of 2.26%, with DBS and UOB at 2.2%.

In a report round-up of the banks, CLSA says that NIMs are expected to peak by the end of this year. “DBS indicates a possibility of upside bias through 2HFY2023 while OCBC and UOB indicate NIM should generally hold firm at current levels,” says CLSA.

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Loan and asset yields have been firm for the three banks. The NIM variance was affected by deposit pricing catching up.

With NIM almost peaking near the tail end of the interest rate hike cycle and higher funding costs of the banks’ liabilities, the bulk of the earnings lift is more or less over.

Loan growth was tepid so guidance was lowered to low- to mid-single digits for the banks.

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CLSA notes: “Loan growth is the metric where we saw a moderation in expectations in 2QFY2023 given the softening in the macro environment driving softer demand for loans. The other factor is that onshore rates in Greater China (estimated at around 16%–30% of asset book for the three) are lower and in a weaker currency, so offshore loan demand had dropped in the past couple of quarters.”

On the credit cost front, UOB had to make a specific provision (now known as ECL 3) for Thai-listed Stark Corporation which was suspended because of investigations into alleged fraud, according to media reports.

OCBC set aside additional general provisions (ECL 1 and 2) due to a change in its MEV (macroeconomic variable) model. The troubled credit refers to commercial real estate (CRE) in the US. According to an announcement on SGXNet, OCBC had provided Manulife US REIT (MUST) with a US$100 million ($134.5 million) green loan for the Peachtree office building in Atlanta in May 2020 and an unsecured sustainability-linked loan of US$250 million along with DBS in March 2021.

In July, MUST’s manager announced it had breached its financial covenant following a downward revaluation of its portfolio.

DBS had the best outcome for credit costs, which remained low at around just 8 basis points in 1HFY2023.

“The real surprise was a change in tone on asset quality outlook. UOB and OCBC raised credit cost guidance on higher macro and CRE-related risks,” says an update by Bank of America (BofA).

“Higher pre-emptive general provisions booked by UOB and OCBC, along with a downgrade of a US CRE account by OCBC, suggests early cracks may start to appear and chances of asset quality ‘accidents’ are still probable in the current environment,” BofA adds.

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Based on OCBC’s Pillar 3 report, Bloomberg Intelligence also noted: “OCBC’s worsening credit quality in loans to small and medium-sized enterprises might warrant caution amid rising macro risks.”

In 2QFY2023, the average probability of default (PD) of OCBC’s SME loans rose to 9.97% from 9.47% in December 2022.

This is in contrast to the falling PD trend for DBS and UOB, Bloomberg Intelligence observes. OCBC’s gross NPL (non-performing loan) ratio was steady at 1.1% in 2QFY2023.

Of the three, DBS remains more sanguine about the asset quality outlook with continued general provision write-backs based on its MEV model.

Nevertheless, analysts say DBS and UOB raising base dividends out of turn was also a positive surprise. DBS is also expected to continue paying higher dividends.

DBS’s dividend trajectory looks to be intact, note CGS-CIMB Research analysts Andrea Choong and Lim Siew Khee, who add that the bank’s elevated trajectory over FY2023–FY2025 will “sustain investor interest” in the stock.

“Its quarterly dividend per share (DPS) rose to 48 cents in 2QFY2023 amid its guidance of 24 cents annual DPS increment in the medium-term; this implies another DPS hike to 54 cents in 4QFY2023, bringing FY2023’s total ordinary DPS to $1.92,” write Choong and Lim. The analysts retained their “hold” call with an unchanged target price of $35.30.

“Imputing its increment guidance and track record of raising DPS in 4QFY2023, we expect FY2024 ordinary DPS to total $2.22 (1QFY2024–3QFY2024: 54 cents, 4QFY2024: 60 cents). This is notwithstanding the $3 billion surplus (or $1.20 per share) in excess capital that DBS aims to distribute via ordinary DPS step-up (most preferred option), special dividend, or buyback over the next three years,” they add. “A conservative annual 30-cent special DPS brings our total FY2023–FY2025 DPS to [around] $2.22–$2.70.”

BofA has a slightly negative sector view as it does not see scope for a major re-rating until there is more clarity on growth and asset quality. “DBS remains our relative pick [because of] potential for outperformance on NIMs, asset quality and dividends,” BofA adds.

Other analysts from Maybank Securities and UOB Kay Hian have raised their target prices to $39.36 and $44.35 respectively from $38.51 and $41.50 previously while keeping their “buy” calls on DBS.

Maybank Securities’ Thilan Wickramasinghe has also upped his FY2023–FY2025 earnings estimates by 4%-6% as he sees the group’s scale and franchise driving its growth.

“The group’s strong franchise is helping asset yields expand in the current higher-for-longer interest rate environment while keeping funding cost escalations under control. Strong wealth management inflows are poised to deliver additional growth as market conditions turn,” he notes.

“These factors should be supportive of higher sustainable medium term return on equities (ROEs) as well as materially increased dividend upgrades,” he adds.

UOB Kay Hian’s Jonathan Koh has also raised his FY2023 earnings forecast by 3% due to the better-than-expected 2QFY2023 results and mild upside for NIM for 2HFY2023. To him, the bank’s $10 billion net profit goal for the full year is “within reach”.

Goldman Sachs’ Melissa Kuang has upgraded her call to “neutral” with a revised target price of $35.30 as she is now more optimistic about DBS’s outlook following its management’s revised guidance.

“We [now] see better NIM trajectory, as NIMs are still yet to reach their peak driven by the recent Fed rate hike and higher Hibor [Hong Kong interbank offered rate]. Capital returns [are also] likely [to be] more and earlier than previously expected; as such, we believe management is keen to pay out more capital to help reduce the build-up of capital on the balance sheet,” she says.

DBS offers better risk-reward with NIM and dividend

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