That said, dividend guidance should remain optimistic, he adds, with further capital releases when Basel IV is implemented in 2024. “United Overseas Bank (UOB) could marginally surprise on the upside from stronger Asean capital growth, but need to watch foreign exchange translation.”
UOB will report its 3QFY2023 results ended Sept 30 on Oct 26, followed by DBS on Nov 6 and Oversea-Chinese Banking Corporation (OCBC) on Nov 10.
Wickramsinghe has “hold” calls on UOB and OCBC, with target prices of $30.86 and $13.19 respectively. He calls “buy” on DBS, with a target price of $39.36.
Flattish NIMs, weak loans
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Sector NII in 2QFY2023 expanded 2.7% q-o-q, partly from supportive NIMs, says Wickramasinge. DBS NIMs grew 4 basis points q-o-q last quarter, while UOB and OCBC were flattish.
The Fed rate hike in July could add to asset yields, notes the analyst. “Concurrently, we saw rational deposit competition in 2QFY2023, with stable current accounts and savings accounts (CASA) ratios.”
The sector is “flush with liquidity”, he notes, with the loan-deposit ratio at around 81%. Wickramasinghe expects similar trends to persist in 3QFY2023. “Hence, NIMs should remain at current levels.”
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On the other hand, loans fell 1% y-o-y in 2QFY2023. Weak demand for trade-related debt was a key driver, he adds. “Continued weakness in China, plus accessibility of cheaper domestic funding could likely drive further contraction in volumes.”
China’s medium-term lending facility rate rate was 2.65% compared to six-month Singapore Overnight Rate Average (SORA) at 3.71%.
Wickramasinghe expects to see further downgrades to management guidance for 2HFY2023. “Significant market volatility should have been supportive for customer hedging flows in trading income. However, own-book investment gains may have seen a deceleration given a yield curve that shifted higher and inverted steeper.”
Separately, despite “reasonable” new money inflows in 2QFY2023, wealth management fees showed little signs of recovery given cautious client sentiment and high rates keeping funds locked up in deposits. These trends are likely to persist in 3QFY2023, he adds, increasing downside risks to fee income.
Non-performing loans under control
Non-performing loans (NPL) ratios were flat q-o-q and new NPL formation was benign in 2QFY2023, notes Wickramasinghe. “We think current interest rates seem to be high enough to filter out marginal customers, while not high enough to cause undue stress to a majority of customers, which are skewed towards large corporates and SMEs.”
In this context, he expects asset quality to remain supported in 3QFY2023. “However, additional cautionary provisions from slower macro growth cannot be discounted.”
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Similarly, he expects a more cautious tone from management on asset quality and provisioning. “While no dividend surprises are expected, continued guidance for higher potential payouts are likely given upgrades to common equity tier-1 ratio (CET-1) following Basel IV implementation next year.”
Overall, Wickramasinghe thinks UOB has the highest potential to surprise on the upside from stronger Asean contribution and upside from Citi integration, although foreign exchange translation risks from a higher Singapore dollar need to be considered.”
As at 10.46am, shares in DBS are trading 33 cents lower, of 0.98% down, at $33.44; while share in UOB are trading 21 cents lower, or 0.74% down, at $28.13; and shares in OCBC are trading 3 cents lower, or 0.23% down, at $12.95.
