Singapore banks’ Q2 performance to be weighed down by higher costs, weaker loans: Analysts

SINGAPORE - Analysts across the board are expecting a weaker quarterly performance from the trio of local banks in their upcoming second-quarter business update, amid a continued rise in costs and provisions.

Earnings for the three banks are expected to peak in 2023, as loan growth tapers off, while the market braces itself for

yet another potential round of rate hikes by the US Federal Reserve within the year.

Maybank analyst Thilan Wickramasinghe expects the banks’ net interest income (NII) deceleration to deepen further due to higher funding costs and lower loan volumes.

He noted the banks’ first-quarter NII contracted 2.7 per cent quarter on quarter, as net interest margins fell between one and four basis points in the same period, with the exception of DBS Bank.

“We expect this trend to be more pronounced in Q2 2023, with DBS likely the least affected, given its large, low-cost liquidity base and potential safe haven flows during the US/Credit Suisse crisis at the end of Q1 FY 2023.”

The loan segment is also expected to contract further, as China’s recovery remains tepid, Mr Wickramasinghe added.

His point was echoed by other analysts, including S&P Global’s analyst Ivan Tan, who believes loan growth will likely remain tepid, as lending rates weigh on appetites for consumer and business borrowing.

At the same time, costs are starting to catch up.

Mr Tan observed that depositors have been shifting into higher-yielding fixed deposits, and that the proportion of low-cost current and savings account deposits has steadily declined over consecutive quarters.

“The realities of higher borrowing costs, coupled with still-elevated inflation, will register more prominently in 2023,” he said, adding that it could result in some “backsliding” in banks’ non-performing loan (NPL) ratios after a slight improvement in 2022.

One theme that analysts are watching closely in 2023 is the banks’ ability to manage capital.

As interest rates continue to rise, this will inevitably lead to higher provisions.

However, analysts do not appear too worried, as they expect asset quality to remain “benign” in the second quarter. These credit costs and expenses are thus likely to remain “manageable”, said a research team at DBS.

Even at its worst, the NPL ratio is likely to remain below 2 per cent, said S&P’s Mr Tan.

Ahead of the upcoming earnings announcement, DBS research has maintained its “hold” ratings on both UOB and OCBC Bank on high dividend yields, which would support share prices even as earnings peak.

At a valuation of about 0.95 times price-to-book value, DBS analysts see the duo as “undemanding”, though they do not think there were any “immediate catalysts” on the horizon.

On the other hand, Citi Research analyst Tan Yong Hong was more upbeat on OCBC, noting its 50 per cent payout ratio guidance.

Mr Tan thinks the bank could see upside risks from its capital position as well as a higher Asean, lower China exposure on its loan mix.

Mr Wickramasinghe also signalled a potential “surprise on upside” on OCBC’s earnings per share in the second quarter, arising from a better-than-expected mark-to-market recovery of its insurance business.

But he cautioned that a stronger Singapore dollar and a weaker China could result in downside risks to UOB’s Asean and North Asia operations.

The research house has a “hold” call on both OCBC and UOB, with target prices of $12.45 and $30.53 respectively.

This quarter’s earnings season will be kicked off by UOB on Thursday, followed by DBS on Aug 3 and OCBC on Aug 4.

THE BUSINESS TIMES