Banks

NIM Tailwinds – Key Driver Of FY23F ROE Growth

• Stay OVERWEIGHT, Top Picks: DBS and OCBC Bank (OCBC). Singapore banks (SG Banks) are off to a decent start – rising 2% in the first week of 2023, after gaining a decent 7% (STI: +4%) in 2022. Tailwinds from NIM expansion would keep ROE on an upward trajectory, underpinning positive share price re-rating. China’s faster-than-expected pivot on its zero-COVID policy could create some near-term risks, but remains a long-term positive for Singapore. Preferred picks: DBS for its higher NIM sensitivity to interest rate changes, and OCBC given its cheaper valuation.

• RHB economists more sanguine on outlook. RHB economists expect the Singapore economy to moderate slightly to 3.0% in 2023, from 3.7% in 2022. We expect growth to decelerate in 1H23 before stabilising in 2H23. Our 2023 GDP growth is more bullish than consensus’ growth forecast of 1.8% and the Ministry of Trade and Industry’s (MTI) projected expansion of 0.5-2.5%. MTI expects the challenging global environment to weigh heavily on Singapore’s export-oriented sectors.
• Loan demand has softened. According to data by the Monetary Authority of Singapore (MAS), commercial banks have seen a contraction in loans in Oct and Nov 2022. We believe businesses are turning cautious while households are tightening their belts due to the rapid rate hikes and uncertain 2023 outlook. This suggests downside risks to our FY23 loan growth forecast of 5.0% YoY (FY22F: +5.8%). SG Banks’ loan growth has moderated to 6% (annualised) in 9M22 vs +9.6% in 2021.
• Room for further NIM expansion in 1H23. System CASA deposits were down 17.4% YTD-Nov 2022 even as rising fixed deposit (FD) rates led to a sharp 64% YTD jump in FDs. While the declining CASA deposits and intense deposit competition would mean higher cost of funds ahead, tailwinds from the cumulative 230-240bps hikes in Singapore’s short term rates in 2H22 and further increases in 1H23 given expectations for another 75bps rise in the Federal Funds Rate (FFR), should lift NIM further in FY23. For 9M22, sector NIM expanded by 20bps YoY. We believe DBS, which had a higher CASA ratio of 60.3% at end-3Q22, would be better positioned to deliver NIM improvement. UOB’s CASA ratio stood at 49.8% while OCBC’s was 56.1%.

• Guiding for higher credit cost. Due to the COVID-19 health crisis, SG Banks’ loan portfolios are now well seasoned. Sector NPL ratio improved to 1.29% in 3Q22 from a high of 1.57% in 1Q20, and stress tests indicate that asset quality will be resilient, even at interest rates of 6-7%. Still, banks are staying prudent, guiding for higher credit cost and preferring not to release management overlays built up to ensure they have strong provision buffers to absorb any potential deterioration in asset quality. As at end-3Q22, nonperforming asset coverage stood at a high 120% for DBS, 108% for OCBC and 98% for UOB. We have conservatively pencilled in credit cost of 19bps for FY23F – this compared with 14bps for FY22F.

• FY23F earnings to improve 20% YoY, buoyed by further NIM expansion and a moderate rebound in non-II that would comfortably cushion the uptick in credit cost. This would lift sector ROE to 13.6%, from 12.0% in FY22F. Key downside risks to our investment view are: i) A sharper-than-expected downturn in global economies, ii) escalation of the Russia-Ukraine war that would further disrupt commodity exports and intensify inflationary pressures, as well as iii) significant deterioration in asset quality.

Source: RHB Securities Research - 9 Jan 2023