In a results briefing on May 7, group CEO Wee Ee Cheong says: “It’s still a very fluid situation, and the impact is too early to quantify. The global outlook has changed significantly. The world order has been disrupted by US tariffs. While it is too early to quantify the exact impact, we expect growth to slow in the near term.”
DBS Group Holdings, too, turned more vague in its 2025 outlook at the release of its results for 1QFY2025 ended March 31. With three rate cuts expected, DBS guided for “lower group NIM, offset by balance sheet growth”.
In response to The Edge Singapore’s queries, however, DBS CEO Tan Su Shan provided more specific guidance for NIM and loan growth. Tan says April’s exit NIM — after the 1QFY2025 reporting period — was 2.09%, and DBS’s FY2025 NIM “will be plus or minus a few basis points from that”, depending on the US Federal Reserve’s decisions.
DBS’s May 8 results briefing came just hours after the Fed announced it would hold rates. Tan, in her first quarterly results since taking over from Piyush Gupta on March 28, says DBS has “hedged out about a third of our loan book on fixed rates so our impact won’t be that great”. “Our income will also be mitigated by an increase in deposits, particularly Casa.”
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DBS will not change its guidance on NIM sensitivity, which Tan and CFO Chng Sok Hui reiterate was announced last year at around “$4 million to $5 million” per basis point (bp).
Loan growth, meanwhile, should end the year at between 5% and 6%, according to Tan. “It does depend on what happens in the second half… Last year, we thought it would be two rate cuts; now, it looks like it will be three. Whether it’s two or three, the NIM wouldn’t change by that much because it will all be in the second half of the year, so it doesn’t really affect the full-year NIM too much, but we’re ready for three.”
On paper, Tan has guided for FY2025 net profit to be below FY2024 levels, mainly due to the global minimum tax of 15%. Markets trading income, which could be ephemeral, more than doubled q-o-q to $363 million — the highest in 12 quarters — as interest rate, FX and equity derivative activities benefitted from market volatility and as funding costs fell.
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Lower funding cost and accounting asymmetry for markets trading more than offset commercial book NIM decline of 9 bps q-o-q due to lower interest rates.
Downward revisions
Singapore’s Ministry of Trade and Industry lowered its 2025 growth forecast to 0%–2% on April 2, down from 1%-3%. The International Monetary Fund (IMF), too, has revised growth for the Asean-5 down to 4% from 4.6%. The Asean-5 consists of Indonesia, Malaysia, the Philippines, Singapore and Thailand. UOB has a presence in Indonesia, Malaysia, Singapore and Thailand, and DBS is present in Indonesia and Singapore.
UOB has built up its UOB Foreign Direct Investment (FDI) Advisory office in the region, with offices in Asean, Seoul and Tokyo and a German FDI Advisory office in Singapore to tap intra-regional flows.
“Trade constitutes about 10% of our balance sheet. Most of our trade is intra-regional and China+1,” Wee says.
According to group CFO Leong Yung Chee, UOB’s customers, including exporters to the US, are likely to experience only a limited impact. “The first-order impact on us for customers who supply directly to the US is pretty manageable. The stress test that we are conducting when we look at the second-order impact, and potentially third-order impact, is a little bit more complicated, because there are so many different assumptions that have to go in, and how stressed you want some of those macroeconomic variables that we need to input. [Those have] yet to land, and depend on some of the outcomes you will see in the coming weeks,” Leong explains.
UOB misses Street estimates
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UOB’s net profit of $1.49 billion in 1QFY2025 ended March 31, down 2% q-o-q and unchanged y-o-y, missed estimates by about 3.3% because of higher general provisions (GP).
“UOB’s 1QFY2025 net profit missed our estimate by 2% and consensus by 4% on higher credit charges. Pre-provision profit was in line with estimates. The key positives were a net interest income beat on stable net interest margins, and a non-interest income beat on strong fee growth and trading,” says CLSA in an update.
Non-performing asset (NPA) formation in the first quarter was $400 million, driven by one Hong Kong property account that is fully provided for.
The amount banks set aside for the general provisions is guided by their macroeconomic variable (MEV) models. Leong says UOB has not changed its MEV model. “We are in the process of reviewing what needs to be changed. We do expect, on a broad basis, growth and trade probably to be impacted.”
Even then, UOB provided 16 bps of loans for its GP without any change to its MEV model. “Management will adjust macroeconomic variables in 2Q2025, which could imply higher GPs. The overall aim is to get GP to be 90 bps of loans,” a Citi report says.
“The second-order impact is what we are more concerned about, but the very variable assumptions that go into that have so many different values around consumer confidence [and] job security. If some of these uncertainties pan out and stress the economy in that direction, there will be [an] impact on SMEs in terms of consumer spending and people’s willingness to consume in the domestic markets,” Leong says.
In 1QFY2025, UOB recorded net interest income of $2.4 billion, up 2% y-o-y but down 2% q-o-q. Loans grew 6% y-o-y and 1% q-o-q. Net fee income rose 20% y-o-y to a new high of $694 million, driven by growth in loan-related and wealth management fees.
Other non-interest income eased 5% y-o-y from lower trading and investment income, but grew 25% from the previous quarter, due to strong customer treasury income and good performance from trading and liquidity management activities.
Some analysts have trimmed their target prices on UOB following the results, with Morningstar Equity Research’s fair value estimate down 5% to $39 and CGS International Research’s target price down 20 cents to $38.80, but with an “add” call.
Jefferies is keeping its target price at $43 with a “buy” call. RHB Bank Singapore, meanwhile, trimmed their target price on UOB by just 10 cents to $37.50, while staying “neutral” on the bank’s stock.
Funding and liquidity
Rena Kwok of Bloomberg Intelligence says DBS’s robust funding strategy and liquidity management can buffer market volatility from tariff uncertainties and growth concerns, underpinning healthy earnings resilience despite likely rate cuts. Its low cost-deposit ratio rose to 53%, with a 76% loan-to-deposit ratio as of 1QFY2025. The bank will earmark excess funds for non-loan assets if loan demand weakens.
According to Philip Fernandes, DBS’s corporate treasurer, DBS — like all banks — has to keep a liquidity buffer known as high-quality liquid assets (HQLA) that are able to withstand 30 days of deposit withdrawals.
“The HQLA portfolio contributes to the liquidity coverage ratio (LCR) and the net stable funding ratio (NSFR). The second [demand for non-loan assets] is for any clients that are in the bond markets. We would have known substitutes, and these come from a range of different borrowers. Thirdly, we will do certain secure financing transactions, which are highly collateralised with high-quality collateral, so the credit risk of all these instruments is actually lower than their loans,” Fernandes explains.
UOB’s LCR was unchanged q-o-q at 143%. When asked about any changes to UOB’s liquidity and its views of US treasuries within its HQLA portfolio, Leong says UOB has a small amount of US treasuries and the bank does not reveal the amount.
“We do not expect the uncertainties we face in the next quarter or so to be as severe as what we saw during Covid-19. Our capital positions and liquidity positions are more than sufficient and adequate,” Leong says.
Raising general provisions for overlays
DBS, meanwhile, announced a net profit of $2.89 billion, in line with the Street’s $2.87 billion estimate. Like UOB, credit costs were elevated as the bank recorded higher general provisions of $205 million pre-emptively, causing total credit costs to spike to 30 bps.
It remains to be seen if the FY2025 guidance of 17 bps to 20 bps with the potential for allowance writebacks, made in February, pans out.
CFO Chng explains that DBS raised its general provisions by $205 million to be added to its management overlay of $2.6 billion. Management overlays are additional provisions over and above what banks’ MEV models suggest they need.
“We added $205 million to general allowance reserves as a prudent measure, given the recent escalation in macroeconomic and geopolitical uncertainty. The increase in general allowances is not driven by deterioration in the credit performance in our portfolio,” Chng says.
“There’s a baseline stack where we factor in a credit cycle index based on the sector and the country, which we adjust as the MEV adjusts. On top of that, we overlay the stress scenarios. We have a very high overlay GP. These are stress MEVs, which we don’t expect to manifest in the near term. Unless things deteriorate a lot more, we have enough buffers to cushion it,” the DBS CFO explains.
Generous with dividends
Wee has reiterated that UOB will continue to pay out 50% of its net profit as dividends, and remains committed to its $3 billion capital return. “We continue to roll our three-year capital management programme and we are committed to a 50% payout for dividends, generated by earnings,” he confirms.
Meanwhile, Tan says DBS will maintain its dividend of 60 cents and its capital return of 15 cents “as long as our ROE stays within the range of 15%-17% and I’m comfortable that we can continue to deliver this dividend”.
CGSI points out that DBS’s total payout of $3.06 for FY2025, “based on our estimates, translates to an attractive yield of 7.2%”. CGSI maintains its “hold” rating for DBS with an unchanged target price of $43.10 as it sees a lack of earnings growth in FY2025 due to the implementation of a minimum tax rate, but acknowledges that the high dividend yield could draw investors.
JP Morgan says in the next six months, the key risks include asset quality deterioration, sharp NIM decline, and a rethink on capital management. "All these have held up well in 1Q2025 and April, with no meaningful shift in payout being flagged. We expect the stock to stay firm, especially within the Singapore/ developed Asia banks context. Maintain overweight."
