- Stay OVERWEIGHT, Top Picks: DBS and OCBC Bank. The three listed Singapore banks (SG Banks) closed 2022 with net profit reaching new highs. Initial assessment of a very challenging 2023 is beginning to give way to a more sanguine view. We expect sector core earnings to grow by a still-robust 21% YoY in 2023, despite the expectation that NIM tailwinds will dissipate. Growth should be led by a rebound in fee income and China’s earlier-than-expected reopening. FY23F dividend yields of 5-6% are also very decent.
- Expect mid-single-digit loan growth in 2023. SG Banks reported a loan contraction of 2.5% QoQ in 4Q22, as concerns over a global economic slowdown saw businesses turning cautious and some borrowers repaying opportunistic borrowings. However, with ASEAN economies holding up better than expected, banks expect a pick-up in loan demand and believe that mid-single-digit loan growth is within reach. In FY22, sector loan growth was a muted 1.9% YoY.
- NIM to expand 20-35bps in 2023. Having seen NIM expand by 30-37bps in FY22, SG Banks are guiding for another rise of 20-35bps in FY23F. This is based on the expectation that the FFR will rise by 50-75bps to 5-5.25% in 2023. NIMs will likely peak in 1H23, before the catch-up in funding costs leads to lower margins in 2H23. It is also positive to note that deposit competition, which was very intense at end-2022, has started to abate. DBS and United Overseas Bank (UOB) expect NIM uplift of 34-35bps in FY23F, while OCBC sees a smaller increase of 20bps.
- Fees income would be a key earnings driver in FY23F. Healthy inflow of net new money (NNM) in 4Q22 has led to optimism the wealth management business will stage a recovery in 2023. There are early signs that investors are turning more positive, after being in a risk-off stance for most of 2022. Further recovery in intra-regional trade flows would also have a positive impact on fees from trade-related products. DBS and UOB are guiding for double-digit growth in fee income for FY23F.
- Watchful on asset quality. SG Banks saw a sustained downtrend in impaired loans, as the country transitioned to endemicity in 2022. Sector NPL ratio eased to 1.28% in Dec 2022, below pre-pandemic levels of 1.5-1.6% in 2017-18. Although they are not seeing any material signs of weakness, banks believe the rapid interest rate hikes in 2H22 could result in some upticks in NPLs. They have guided for a mild uptick in FY23 credit costs, with robust LLC providing buffers against potential spike in NPLs. NPA coverage stands at 114% for OCBC, 102% for DBS and 84% for UOB. We have factored in higher credit cost of 17bps for FY23F, compared to 13bps in FY22.
- Higher dividends in the offing. The three banks upped their dividend payouts for FY22, helped by strong earnings and robust capital buffers. With CET-1 ratios at very comfortable levels – 14.6% for DBS, 15.2% for OCBC and 13.3% for UOB – and still healthy profit growth for FY23F, we believe higher DPS are in the offing. This translates into very decent yields of 5-6%.
- Sector earnings to grow 21% YoY in FY23F. Post 4Q22 results, our FY23F-24F sector net profit is raised marginally, by 1-2%. Our FY23 core earnings are projected to rise 21% YoY on robust topline growth that would comfortably absorb low-teens cost growth and the moderate uptick in credit cost. Sector ROE is projected to improve to 14.6%, from 12.1% in FY22. Key downside risks to our investment view are: i) A sharper-than-expected downturn in global economies, ii) deposit competition elevated for longer, and iii) a significant deterioration in asset quality.
Source: RHB Securities Research - 8 Mar 2023
