RHB’s top pick is DBS Group Holdings (DBS) for its steady earnings and attractive earnings, followed by the Overseas-Chinese Banking Corporation (OCBC) over United Overseas Bank(UOB), for the former's stronger asset quality metrics.
RHB has kept its “buy” call on DBS, with a target price (TP) of $47.00, and “neutral” calls on both OCBC and UOB with TPs of $17.50 and $37.50 respectively.
In the period, banks posted a 2% y-o-y drop in profit after tax and minority interests (patmi), weighed by a combination of higher loan impairment allowances due to pre-emptive provisioning and a higher tax rate following the adoption of the global minimum tax rate.
However, sector patmi rose 9% y-o-y due to a seasonally softer preceding 4QFY2024.
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“DBS’ and OCBC’s results were in line but UOB’s appears to be tracking below expectations as its move to beef up loan loss coverage ratio (LLC) saw credit cost significantly exceed its earlier guidance. It remains to be seen if UOB was front loading its preemptive allowances,” says RHB.
In the 1QFY2025, pre-positioning operating profit (PIOP) grew 4% y-o-y on the back of stronger operating income and neutral jaws.
While RHB recognises that non-interest income was the key income driver with a 9% y-o-y increase, net interest income (NII) grew 2% y-o-y with asset growth partly offset by net interest margin (NIM) pressure.
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“The above, however, were more than offset by a 67% y-o-y rise in loan allowances as banks booked in higher preemptive general allowances in lieu of the uncertain macroeconomic environment, coupled with a higher effective tax rate of 16.3%,” adds RHB.
RHB also notes that annualised loan and deposit growth were at a decent 4% and 7% while sector NIM eased 8 basis points (bps) y-o-y, mainly due to OCBC’s NIM squeeze while the other two banks saw relatively resilient NIMs.
Sector cost-to-income ratio (CIR) was stable y-o-y at 39.3%, while sector credit cost rose to 30 bps from 19 bps in the 1QFY2024.
The sector non-performing loans (NPL) ratio was also steady y-o-y at 1.2%, while LLC improved to 117% in the 1QFY2025 from 114% in the 4QFY2024 and 1QFY2024.
Overall, Singapore’s banks were unanimous that the first order impact from the US tariff policy was manageable, given limited exposures to segments at risk.
However, the second order and spill over impact were still being assessed.
“UOB notably suspended its 2025 guidance citing poor visibility, while DBS and OCBC broadly retained theirs,” notes RHB.
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Potential segments at risk noted by RHB include small and medium-sized enterprises (SME) and unsecured consumer financing, while April’s business momentum should be resilient, albeit potentially aided by front-loading activities.
“The impact from tariffs could be felt in 2H2FY205, likely impacting operating income, eg loan growth and loans and wealth fees. Finally, while the outlook is uncertain, banks retained their dividend and capital return commitment.”
With this, RHB tweaked its FY2025 to FY2027 sector patmi lower by around 0.5% per annum (p.a.), after lowering UOB’s FY2025 to FY2027 patmi by 2% each year.
On the other hand, earnings forecasts for OCBC and DBC are unchanged.
For the whole of FY2025, RHB expects sector earnings to contract by 3% y-o-y on the back of a 1% y-o-y decline in PIOP due to NIM squeeze, a slight uptick in credit cost, and a higher effective tax rate.
However, for the coming FY2026 and FY2027, RHB sees patmi rebounding with a growth of 3% to 4% y-o-y underpinned by stronger non-interest income.
RHB believes that upside risks to the banks’ earnings would be a better-than-expected NIM if the US’ Federal Funds Rate (FFR) cuts turn out to be milder than expected, non-interest income elevates and finally, credit costs come in lower-than-expected.
Conversely, downside risks could come from NIM, loan growth, weaker-than-expected other non-interest income particularly on the treasury and markets front, as well as higher-than-expected credit cost.
As at 1.25 pm, shares in DBS are trading 9 cents lower or 0.20% down at $44.51, while the respective shares in OCBC are trading 5 cents lower or 0.31% down at $16.27 and shares in UOB are trading 23 cents lower or 0.65% down at $35.27.
