DBS Group Holdings is CGSI’s top pick, with an “add” call and $47.90 target price, owing to the “clarity” of its capital return initiative, which supports FY2025 to FY2027 yields of 6.6% to 7.6%.
Tay and Lim expect DBS to post net profit of $2.79 billion for 2QFY2025 ended June 30, up 0.1% y-o-y but down 3.7% q-o-q.
They also have an “add” call on United Overseas Bank (UOB), with a $38.60 target price. Tay and Lim believe UOB will post 2QFY2025 net profit of $1.41 billion, down 5.1% y-o-y and 5.3% q-o-q, as the bank’s higher Asean exposure could translate into higher specific provisions due to softer economic conditions in the region.
Finally, Tay and Lim have a “hold” call on Oversea-Chinese Banking Corporation (OCBC), with a target price of $17.20. They expect OCBC to post 2QFY2025 net profit of $1.79 billion, down 8.2% y-o-y and 5.2% q-o-q, as net interest margin (NIM) compression could take centre stage following a steep 11 basis point q-o-q decline in 1QFY2025.
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NIM compression
Overall, Tay and Lim expect the banks to post weaker net interest income (NII) q-o-q in 2QFY2025 as a result of NIM compression following lower interest rates and softening loan growth.
“We expect NIMs across the three banks to compress by a wider 5 to 7 bps in 2QFY2025 compared to the 2 to 3 bps compression in 1QFY2025 with the exception of OCBC, which saw an 11 bps q-o-q NIM compression in 1QFY2025,” they write.
Latest banking industry statistics by the Monetary Authority of Singapore (MAS) released for May also showed two consecutive mom declines in loans , suggesting NII should see a decline in 2QFY2025, though deployment of excess liquidity into high-quality liquid assets (HQLA) could help soften the impact from lower interest rates, write Tay and Lim.
Weaker Asean economies
CGSI thinks the three banks could see credit costs “trend towards the higher end of their previous FY2025 guidance” in 2QFY2025 due to weakness across Asean economies.
For context, DBS had guided for FY2025 credit costs to range between 17 and 20 bps; OCBC had guided for 20 to 25 bps; while UOB had guided for 25 to 30 bps.
However, CGSI does not expect total credit costs to change drastically q-o-q, as pre-emptive general provisions (GPs) recognised by the Singapore banks in 1QFY2025 “should remain sufficient amid the current credit cycle”.
Given that DBS had provided 30 bps in total credit costs in 1QFY2025, CGSI thinks it could see the most reduction in credit cost recognition in 2QFY2025.
Meanwhile, OCBC could potentially communicate a new set of capital return initiatives following its unsuccessful bid to privatise its insurance subsidiary Great Eastern, says CGSI.
As at 1.49pm, shares in DBS are trading 3 cents higher, or 0.07% up, at $46.12; while shares in UOB are trading 7 cents lower, or 0.195 down, at $36.70; and shares in OCBC are trading 8 cents lower, or 0.47% down, at $16.92.
