The year 2024 will be remembered for movements in the local banks’ senior management. After 15 years at the helm of DBS Group Holdings, group CEO Piyush Gupta announced he will retire in April 2025. Tan Su Shan, the current deputy CEO, will take over the CEO role in April next year.
At United Overseas Bank (UOB), group CFO Lee Wai Fai will step down in April after 20 years and move on to other roles in the bank. The new group CFO-designate, Leong Yung Chee, will take over in April 2025. Some market watchers wonder if Ng Wei Wei, currently CEO of UOB Malaysia, may eventually be appointed to a role at UOB’s head office, given the bank’s ambitions outside the home market.
When Gupta was appointed group CEO of DBS in 2009, he was the fifth CEO in 10 years. In the past 15 years, DBS’s net profit has ballooned from around $2 billion to $10 billion and the bank looks set to defend that figure. Based on Bloomberg, from Jan 2, 2010, to Dec 13, DBS has returned 212% in share price alone and delivered a total return of 493%, translating into a CAGR of 12%.
In terms of trends, the Basel III Reforms (B3R) kicked in on July 1 (see sidebar on Page 16). The Singapore banks are likely to benefit during the transition phase and when the output floors kick in, which is why the management of both DBS and UOB have articulated some focus on capital management. Singapore banks benefit from the final B3R, unlike European and US banks.
If the Trump tariffs kick in, interest rates could stay high. At around 3% to 5%, the rates are high enough to maintain earnings and low enough not to cause credit issues for the local banks. Additionally, deregulation that could materialise during Trump 2.0 may drive investors to Singapore banks, which rank among the world’s highest-rated.
Capital management
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“DBS and UOB’s commitment to improve capital management in 3Q2024 should lead to continued re-rating for both these stocks even from current decade-high multiples. The banks’ moats in deposits, payments (cards and transactions), as well as steadily growing wealth management (more for DBS) would lead to earnings per share (EPS) sustaining at close to current levels for the next 2-3 years. This, combined with prospects of slower risk-weighted assets (RWA) growth and 15.2% fully phased in CET1, should reflect in progressively increasing regular dividends and further buybacks,” says JP Morgan in a recent report.
Rate-led profits with low RWA growth are positive for dividends. JP Morgan says regular dividends will be a function of EPS, with special dividends and share buybacks to use the excess capital.
DBS has led the sector with higher dividends, a bonus issue and a $3 billion share buyback programme, which was announced on Nov 6. JP Morgan has forecast a dividend of $2.64 per share in 2025 for DBS, up 19% y-o-y. “The bank appears more open versus peers to use the transitional CET1 buffer [see sidebar] over the five years,” JP Morgan continues.
See also: Final Basel III reforms focus on CET 1 ratio denominator
DBS Group Research concurs in a report dated Dec 4. It prefers UOB to Oversea-Chinese Banking Corp (OCBC) because of a clear plan for further capital management. “We believe a higher ROE trajectory alongside active capital management plans to return capital to shareholders are positives for the stock. The share price remains well supported by its strong provisions buffer of 99% and a forward dividend yield of around 6%, with potential upside for higher dividends,” the DBS report says.
“We prefer UOB to OCBC as we await more clarity on OCBC’s capital management plans, alongside uncertainty from the current voluntary unconditional general offer for Great Eastern, which may weigh on its capital plans,” DBS adds.
Additionally, Bloomberg has reported that OCBC is bidding for PT Panin Bank in Indonesia. During OCBC’s 3QFY2024 ended September results briefing, group CFO Goh Chin Yee said the most important use of capital is for growth.
The DBS report suggests that UOB could undertake a $2 billion share buyback programme, which could be announced during its 4QFY2024 ended December results briefing next year.
OCBC had stated dividends as its preferred method of shareholder returns; DBS has estimated that OCBC has around $2.5 billion (or 50 cents per share) in excess capital.
Interest rate tailwind?
“With Trump’s victory, the rates space has to contend with potential additional tariffs, corporate tax cuts, and fiscal worries. These would likely keep long-end US yields buoyant, which will continue to support banks’ share prices,” DBS cautions.
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Before that, the banks were already optimising fixed-rate asset repricing, extension duration to lower asset yields, and actively managing funding costs in anticipation of lower rates in 2025. Singapore banks began to manage their cost of funds this year actively, resulting in mixed net interest margins (NIM) during their 3QFY2024 ended September results.
DBS’s NIM declined 3bps q-o-q, OCBC’s declined 2bps q-o-q, while UOB recorded stable NIM q-o-q. As fixed-rate assets continue to reprice and floating-rate loans typically experience a lag in adjusting to interest rate cuts, the impact of lower benchmark rates is expected to materialise during 4Q2024.
DBS reckons that in 2025, net interest income sensitivity to US Federal Reserve rate cuts will likely continue to decline for OCBC and UOB.
Apart from the markets’ expectations of fewer interest rate cuts, the banks have also reported lower sensitivities (of net interest income (NII) or NIM) to interest rates given the changes in their funding profiles amid the shift of current account savings account (Casa) into fixed deposits over the rate hike cycle although this trend is reversing.
DBS guided that its NII sensitivity reduced to $4 million per basis point (bp) of the US Fed funds rate versus $18 million to $20 million in 2021. OCBC estimates a 1 bp reduction in benchmark rates of its four key currencies will result in a $4 million decrease in NII annually versus $5 million to $6 million in 1QFY2024. UOB expects a 25 bps US Fed fund rate cut to reduce its FY2024 NIM by 2 bps to 3 bps versus 3 bps to 4 bps in FY2022.
“As Singapore banks increased their fixed-rate assets portion and extended book duration in 3Q2024, we see improved earnings visibility for FY2025, with declining NII sensitivity to rate cuts. As risks skew to less and a slower pace of rate cuts, this may provide upside in FY2025,” the DBS report says.
Credit costs
In 3QFY2024, DBS and OCBC’s credit costs were at or below their run rate, while UOBs were higher than average. During DBS’s 3QFY2024 results briefing on Nov 6, Gupta said he expects more recoveries from its oil & gas portfolio, anti-money laundering cases, and refinanced properties in Hong Kong and China.
OCBC raised its general provisions buffer for credit profile changes of its watchlist accounts in Hong Kong. However, its specific provisions stayed low. UOB took on heftier impairments for integration issues from its Citi retail portfolio in Thailand. CFO Lee said this is not likely to be repeated.
DBS Group Research says the local banks’ asset quality will likely remain benign. DBS and UOB have strong management overlays of of around $2 billion and $1.5 billion respectively.
“Overall, we believe the trend of benign asset quality will continue into 2025. We expect credit costs to fall within the respective 2025 management guidance with no surprises assuming a calibrated soft landing in the global economy,” the DBS report says.
DBS has guided for higher specific credit costs of 17 bps to 20 bps and expects more potential recoveries for its oil and gas portfolio going forward, while UOB has guided for total credit costs at the lower end of 25 bps to 30 bps.
More collateral revaluations on the bank’s commercial real estate (CRE) portfolios in Hong Kong and other overseas markets remain a concern. “We continue to keep a close watch on Hong Kong CRE where Singapore banks have continued to ‘manage down’ their respective CRE office exposure, as vacancy rates in prime areas stay high with new supply entering the market. As market valuations of Hong Kong CRE have declined by as much as 40% from the peak, there may be adjustments to Singapore banks’ valuations as collateral valuations get reviewed,” the DBS report says.
Perils of deregulation
Larger US banks are likely to be positively impacted by the expected general deregulatory environment under Trump 2.0, with consolidation in the sector expected to accelerate, US media have reported.
Final B3R rules (see sidebar) may be rolled back further or scrapped altogether under the new US administration, according to Michael McTamney, senior vice-president at Morningstar.
According to McTamney, delaying or scrapping the B3R rules would benefit the US regional banks as the Globally Systemically Important Banks (G-SIBs) face stringent capital requirements and would be competing with well-capitalised, highly-rated banks in Asia Pacific.
CNBC reports that Janet Yellen, former chair of the Federal and current US Treasury Secretary, warned about deregulation on Dec 13.
“Bankers always complain about over-regulation,” Yellen said on Dec 13. “It’s legitimate to look for areas where the burdens of regulation exceed the benefits and to try to redress that. However, appropriate capital regulation, liquidity, risk-taking and the like are critically important to a sound banking system and economy and should not be interfered with.
“The lessons we learned from those 100-plus years of history is that banks need to be supervised and regulated appropriately to greatly mitigate the odds of failure; that deposit insurance is a critical element in promoting safety and soundness and confidence in the system, and that there needs to be adequate access to liquidity when banks get in trouble,” Yellen warned.
As some market observers put it, surely Trump would not want a failure of the banking system on his watch.
Although deregulation allows banks to operate more flexibly, lowering costs, including compliance costs and enhancing innovation, the jury is out on whether this increased risk-taking could lead to failure or success. Without stringent regulations, banks would adopt riskier practices, consumers could be harmed, and these practices could contribute to systemic risks within the financial system, where the failure of one institution could have widespread repercussions. This was what happened in 2008.
On the other hand, deregulation and lapsed standards by US banks could enhance well-regulated AA-rated and AAA-rated banks, which would attract more customers and investors to them and benefit the Singapore banks.
As a case in point, DBS saw the biggest rise in fund-manager exposure to its dollar AT1 bonds among Asean banking peers in 2024. Rena Kwok, credit analyst, Bloomber Intelligence, says this is “possibly due to its safe-haven characteristics amid foreign exchange and shifting rates expectations near-term post the US presidential election. The lender’s robust credit fundamentals are underpinned by solid risk management, robust earnings and ample excess capital cushions, which received a transitional uplift to final Basel III rules. As of 3Q2024, DBS’ transitional common equity tier 1 ratio stood at 17.2%, with gross non-performing loans ratio at 1%.”
Of note though, is that if a G-SIB US bank fails under Trump 2.0, the repercussions will likely be global.
With that in mind, The Edge Singapore wishes all readers and bank shareholders a happy and prosperous 2025
