All eyes are on capital management and how much Singapore’s three banks will return to shareholders when DBS Group Holdings kicks off the series of full-year earnings calls on Feb 10.
Maybank Securities analyst Thilan Wickramasinghe thinks special dividends are likely from DBS, and likewise from United Overseas Bank (UOB), which is set to post its results for 4QFY2024 ended Dec 31, 2024 on Feb 19.
Oversea-Chinese Banking Corporation (OCBC), however, “has lagged in capital returns clarity so far”, says Wickramasinghe in a Jan 31 note. That could change, adds the analyst, when OCBC reports its 4QFY2024 results on Feb 26.
DBS pays dividends quarterly, while UOB and OCBC announce their dividends semi-annually.
Among the three banks, Wickramasinghe thinks UOB “could surprise the most here”, followed by DBS.
Wickramasinghe has “buy” calls on all three banks, with target prices of $46.91 for DBS, $38.75 for UOB and $17.89 for OCBC. Among the three, Wickramasinghe’s target price for DBS represents the greatest upside, at 5.9% above its Feb 3 close price.
Wickramasinghe forecasts that DBS will report 4QFY2024 earnings of between $2.3 billion and $2.6 billion, which is flattish or positive y-o-y but negative q-o-q.
UOB, meanwhile, should post 4QFY2024 earnings of between $1.6 billion and $1.8 billion, according to the analyst, which should be positive y-o-y but potentially flattish q-o-q.
Finally, Wickramasinghe thinks OCBC will post 4QFY2024 earnings of between $1.9 billion and $2.2 billion, which should be positive y-o-y but potentially flattish q-o-q.
See also: Jefferies targets DBS shares to hit $49; UOB to hit $42; OCBC to reach $19 ahead of 4QFY2024 results
Strong case for capital returns
According to Wickramasinghe, the banks’ sequential earnings — or q-o-q comparison — should be largely flat-to-positive aided by improved credit growth and resilient net interest margins (NIMs).
Non-interest income could see potential upside from trading as well as seasonally stronger credit cards, he adds.
Meanwhile, wealth management should be resilient albeit slower from seasonal factors, says Wickramasinghe.
In addition, he expects asset quality to be benign. “Asset quality should continue to display limited stress with rising recoveries, especially in offshore and marine and North Asia. As a result, credit charges are likely to be within or below guidance. Large write-backs of general provisions is unlikely given the evolving geopolitical outlook between US-China.”
Operating expenses should remain under control, he adds. “We expect cost-to-income ratios (CIRs) to be within guidance, although there is likely some q-o-q employee cost escalations from higher rewards provisions given record results.”
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This leaves the sector with enough room to manoeuvre on capital management, says Wickramasinghe, and excess common equity tier-1 (CET-1) levels “further strengthens the case” for capital returns. “With transitional Basel IV CET-1 ranging from 15.5% to 17.2%, expect momentum and guidance on capital returns to take centrestage.”
Wickramasinghe expects “increased management focus on optimising balance sheets”, which may include special dividends and larger share buyback programme announcements.
Moderate NIM declines
NIM should slide q-o-q with liquidity deployed to low-risk, low-yield instruments, says Wickramasinghe. US Federal Reserve rate cuts between September 2024 and December 2024 could also filter through and create some downside pressure, though the banks have been hedging for this eventuality, he adds. “Overall, we think the pace of NIM declines should be measured.”
System loan growth in November 2024 hit a two-year high at 2.3% y-o-y. Back in 3QFY2024, banks have alluded to credit demand showing signs of life, especially in Asean, technology, media, and telecom (TMT) and renewables, Wickramasinghe points out. “This gives rise to an improved net interest income outlook from better volumes and margins, as credit demand should have broadened from the high-quality, low-margin large corporate loans towards more SMEs and longer-term capital spending.”
Looking back at 3QFY2024, the banks’ own-book trading income surprised on the upside, says Wickramasinghe, and he thinks there could be a repeat in 4QFY2024 given the volatility in foreign exchange, derivatives and rates.
Shares in DBS closed 30 cents lower, or 0.67% down, at $44.31; while shares in UOB closed 19 cents lower, or 0.51% down, at $37.32; and shares in OCBC closed 14 cents lower, or 0.81% down, at $17.26 on Feb 3.
