The US Federal Reserve rate hike cycle is likely to peak somewhere in the first half of 2023, bringing along with it growth in net interest income (NII) of local banks, probably making them the best proxy to future Asian growth.According to analysts, DBS Group Holdings is likely to remain the standout bank. “DBS has been one of the best turnaround cases in the region in the last decade. Most of the improvements are visible on the pre-provisioning operating profit line, including better asset/liability management, lower fees volatility, treasury, wealth management, digital and branding,” says JP Morgan, adding that DBS could become part of multi-decade portfolios of investors.
CLSA points out that local banks including Oversea-Chinese Banking Corp (OCBC) and United Overseas Bank (UOB) have done very well this year: “1QFY2021 to 1QFY2022 net profit after tax growth was largely driven by lower credit costs from early-stage pandemic over-provisioning. Now, the past two quarters (2QFY2022/3QFY2022) growth has been predominantly driven by operating NII uplift, although credit costs remain low.”
In addition to being well-managed and with disciplined growth, the local banks could give higher dividends in 2024–2025. “DBS expects its CET1 ratio to jump to 16% when Basel 4 is implemented on Jan 1, 2024, which provides a comfortable cushion of 2 ppt to 3 ppt above its operating CET1 range of 12.5%–13.5%. OCBC and UOB could see a similar quantum of enhancement to their CET1 ratios. DBS intends to review its dividend policy at end-2022 with a view of hiking dividends per share (DPS) in 2023. Likewise, we would look forward to higher DPS from OCBC in 2023 as well,” brokerage UOB Kay Hian suggests.
Local versus global
What about HSBC and Standard Chartered, two global banks with a strong Asian presence? The charts of their performances over the past 10 years speak for themselves. (see Chart 1)
HSBC’s largest shareholder, Ping An, has grumbled about high costs and publicly called on the bank to spin off its Asian business. Ping An’s view is that a listed Asian-only business would be managed out of Hong Kong with higher profitability and lower capital requirements.
Stanchart, once an emerging market bank with Asian roots, reported a rebound in its net profit this year. In 3QFY2022 ended September, net profit rose 41% y-o-y and 19% q-o-q to US$1.078 trillion ($1.51 trillion). Compare that with DBS’s net profit of $2.236 billion, up 32% y-o-y and 23% q-o-q. Andy Halford, group CFO at Stanchart, guided income growth of 8% to 10% in 2023 off a higher 2022 base, with net interest margin (NIM) guidance at 1.65%.
Bill Winters, group CEO at Stanchart, says: “Trust Bank is a credit proposition. We did that largely because of our partner. NTUC had an existing credit card partnership with the local bank, which they exited to make room for us and Trust Bank. So, we had an immediate uptake in credit cards on the Trust account in addition to debit cards and current account openings. There have been balance transfers. We’re building a nice loan balance early on with customers that are well known to us and our partner, and that bodes very well for a relatively quick accession to profitability.” Winters adds that Trust Bank has garnered 200,000 customers as at Oct 26. Stanchart’s largest shareholder is Temasek Holdings with 16.4%, according to Bloomberg.
Despite losing the NTUC partnership, Helen Wong, group CEO of OCBC, sounded very positive on the morning of Nov 4 during the bank’s results briefing. “I’m still more optimistic on the resilience of our key markets, in particular Asean, so if you look at Singapore, we know that the employment situation remains very firm, travel rebounded and the consumer-facing sector benefited from the re-opening,” she says.
What appeared to underpin her optimism further was the Singapore Fintech Festival (SFF), held from Nov 2–4. “I was at the SFF and I’m so happy to see the flow of people. We have, in the next few weeks, other types of conferences. I have never received so many requests for meetings. There are a lot of people coming to Singapore,” Wong recounts. “So I’m excited about it.”
Of the three group CEOs of the local banks, Wong sounded the most positive. OCBC’s net profit in 3QFY2022 was at a record-high but then so were DBS’s and UOB’s.
Boosted by the Fed
OCBC’s net profit of $1.60 billion was 31% y-o-y and 8% higher q-o-q on the back of a surge in NII which rose 44% y-o-y and 23% q-o-q to $2.099 billion. Net profit for the nine months to Sept 30 rose 14% to $4.442 billion. NIMs rose more than 35 bps q-o-q and 54 bps y-o-y to 2.06%, boosted by the US Fed’s rate hike cycle and OCBC’s digitalisation efforts in cash management initiatives to drive Casa (current account savings account) from SMEs, corporates and SOEs.
While OCBC exited its 3QFY2022 at a NIM of 2.15%, Wong says NIM for the full year is likely to be in the 1.8% to 1.9% range. She points out that the cost of funds is also likely to rise. When asked about NIM and loan growth in 2023, Wong initially maintained the 1.9% NIM outlook but acknowledged it could be above 2%. OCBC’s mid-single-digit loan growth outlook is identical to DBS and UOB’s guidance.
Where Wong differed is her outlook on credit costs. While DBS and UOB have guided 20 bps of credit costs in 2023 with UOB suggesting they could rise to 25 bps to 30 bps if the economy goes south, Wong is expecting OCBC’s credit costs in the teens for both 2022 and 2023.
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Interestingly, DBS and UOB have management overlays of $2.1 billion and $1.4–1.5 billion respectively, OCBC’s management overlays are understood to be well below $1 billion. Management overlays are the amounts over and above regulatory general provisions (ECL1 and 2) that banks wish to keep.
OCBC’s CET1 has been higher than those of DBS and UOB for several years. This is because the capital adequacy ratio of Great Eastern Holdings is consolidated into OCBC. In addition, the impact of moving OCBC Wing Hang’s credit risk framework from a standardised approach to an internal-ratings-based (IRB) approach added 0.6 ppt to CET1. Under the standardised approach, banks apply standard risk weights to their assets. IRB models enable banks to estimate the risk themselves but under certain overarching rules.
Both DBS and UOB have had a mark-to-market impact from their FVOCI (fair value through other comprehensive income) portfolios. Chng Sok Hui, group CFO of DBS, says that out of the bank’s 0.4 ppt decline in CET1, 0.3 ppt was because of FVOCI and 0.1 ppt was attributed to growth in risk-weighted assets (RWA).
Lee Wai Fai, group CFO of UOB, says its FVOCI portfolio had a $1.8 billion impact on CET1, which will be fully recovered as and when the securities mature during the next three years.
OCBC did not have a notable mark-to-market impact on its CET1 (DBS and UOB were both impacted) from its FVOCI securities. “We were rebalancing our portfolio and managed the FVOCI portfolio by hedging. We also had been selling off some of those pre-rate hike portfolios. That’s part and parcel of reshaping our portfolio and managing FVOCI,” explains Goh Chin Yee, OCBC’s group CFO.
Wong points out that exposure to onshore China is very low at about 2% of OCBC’s total portfolio. Of this, only one-third is real estate and of that one-third, 90% is to network customers (from outside of China).
When asked about the impairment of a Chinese loan, Wong says it is from a network customer from Singapore. The loan is secured with Chinese assets and classified as a non-performing loan (NPL) because the bank is looking at the security to repay the loan.
Looking ahead, Wong continues to sound upbeat. “With continued economic recovery as Asean steps out of Covid-19 in 2023, I think Asia will still be more resilient. Travelling has resumed, conferences have resumed and people need to spend money. I hold on to the point that Asia does relatively better,” she reiterates.
Greater China accounts for around 25% of OCBC’s loans and 23% of its operating profit. Most of the loans are from Hong Kong. At any rate, Wong expects policy measures to support growth in China.
“Our Greater China business is about linking Greater China with Asean in the ‘one group’ approach. We have been investing in our product capabilities. We are serving Chinese companies coming to Asean and fintech companies as well,” Wong says. “Our strategy to serve Chinese companies coming to Asean does not change, and the opportunity will continue. Singapore is our hub and this is where the opportunity lies. For every $1 we lend in China, we potentially lend $4 [outside],” says Wong.
Wee Ee Cheong, group CEO of UOB, is also looking to Asean for growth: “We want to be a truly regional bank that grows with our customers and helps them achieve their ambitions. To reach this goal we will double down on three strategic areas, connectivity, personalisation and sustainability. These are recurring themes you will be constantly hearing from us.”
More immediately, UOB completed the acquisition of Citigroup’s retail business in Malaysia and Thailand on Nov 1. These will be immediately accretive to earnings. JP Morgan estimates that the acquisition of Citi’s retail business in Malaysia, Thailand, Vietnam and Indonesia will add 3% to loans, 5% to AUM and around 5% to EPS in a steady state. “The deal is in commercial banking, one of UOB’s core strengths, providing a clear path to integration,” JP Morgan points out. The integration of Vietnam and Indonesia will be completed in 2023.
During UOB’s results briefing on Oct 28, Wee said that UOB TMRW “reached a significant milestone in August, achieving 1 million digitally-acquired customers”. UOB TMRW aims to acquire another 500,000 customers by the end of this year. “This platform will also be key in serving our incoming Citibank customers across the region,” Wee says.
Meanwhile, DBS’s acquisition of Citi’s Taiwan retail assets should add 3% to EPS from 2023 onwards, excluding one-off transaction costs. In addition, DBS will continue to be the main beneficiary from firmer policy rates. This will enable the bank to get to net zero sooner, to help its customers get to net zero, to commercialise cross-border foreign exchange and securities settlement in a joint venture, Partior, and to pilot various tokenisation use cases under Project Guardian.