Despite the earnings drop, Wickramasinghe is seeing improvements ahead. “The sector is in the early phase of operational growth with rising net interest income supported by robust loans and improving net interest margins,” he explains.
“As rates increase and regional re-opening gathers pace, we expect momentum to accelerate – especially in to 2H22,” says Wickramasinghe, as he points out that all three banks saw 1QFY2022 net interest income improved both y-o-y and q-o-q. Their loan growth gained by between 8 to 9% y-o-y and to him, that’s a sign of recovery across the region.
“A slower North Asia remains an overhang, but policy support for economic growth in China is an upside risk. Similarly, re-opening of SE Asia and gathering pace of North-South supply chain relocations should support loan growth going forward, in our view,” says Wickramasinghe.
He adds that for the first time in four quarters, all three banks saw their net interest margins improving q-o-q. He believes that rising rates should provide asset-repricing upside across the portfolio, especially with 56-76% of deposits in current accounts and savings accounts (CASA). Furthermore, 20-25% of their loans are in denominated USD – and largely funded by USD CASA. “This means Fed rate hikes should directly flow through to improving spreads here,” says Wickramasinghe.
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Nevertheless, he warns that asset quality and tail risks from geo-politics, inflation and uncertain macro need to be watched, although the banks’ strong capital levels and provisions provide offsets.
Among the three banks, Wickramasinghe’s “preferred pick” is DBS, given the market leader’s low-cost funding base supporting net interest margin upside from rising rates. From his previous target price of $41.82, Wickramasinghe has slightly trimmed it to $41.22.
Similarly, he has kept his “buy” call on UOB but also with a similarly lowered target price of $34.62 from $36.69 previously. Meanwhile, he has upgraded OCBC from an earlier “hold” to “buy” with a target price kept at $14.04.
