• Stay NEUTRAL; Top Pick: DBS. Singapore banks’ (SG Banks) 2Q24 results were a slight beat on a milder-than-expected QoQ decline in trading and investment (T&I) income, while opex and credit cost tracked below estimates. Amid a scenario of flattish earnings as the interest rate cycle turns, we think the focus should be on dividend yields and DPS growth. Our preferred pick is DBS for capital management. A reduced rate leverage and ample general provision buffers are added bonuses.

• 2Q24 results were a slight beat, with DBS and OCBC posting results that exceeded our and consensus’ expectations on the abovementioned reasons, while UOB’s results were in line. In terms of interim dividends, both DBS’ and UOB’s dividends were as expected, while OCBC’s dividend was above expectations due to the earnings beat.

• Moderating non-II sees 2Q24 PATMI slip QoQ. Sector 2Q24 operating income eased 1% QoQ (+5% YoY) mainly due to lower non-II (-5% QoQ, +10% YoY) on the back of T&I income moderating from the 1Q24 high base. Otherwise, NII was broadly stable QoQ (+2% YoY) with asset growth partly offset by slight NIM compression, while fee income stayed healthy. Meanwhile, sector opex rose 2% QoQ (+4% YoY) but was broadly under control. As such, while CIR ticked higher to 40.5% from 39.4% in 1Q24, the ratio was stable YoY. 2Q24 PIOP eased 3% QoQ (+5% YoY), coupled with loan and other impairments rising 10% QoQ (-23% YoY) – partly impacted by the higher provisions UOB made for contingent facilities, 2Q24 sector PATMI fell 4% QoQ (+7% YoY). Sector loans credit cost was stable QoQ at 18bps (2Q23: 22bps) while GIL improved to 1.17% from 1.2% at end-1Q24. LLC rose further to 117% (1Q24 and 2Q23: 114%) as banks such as OCBC conservatively added provisions for commercial real estate (CRE) exposure.

• Guidance mostly kept. Despite the positive earnings surprise, except for DBS, guidance and targets were retained. Given the opex discipline displayed and mild asset quality environment, DBS lowered its CIR guidance to c.40% (from low-40%) while its specific provision (SP) charge was guided lower to 10-15bps (from 17-20bps). Hence, DBS raised its 2024 PATMI growth expectations to a mid-to-high single digit growth from “above 2023 levels”.

• 2024 outlook. SG Banks have been focused on protecting NII ahead of the rates downcycle by adding duration and fixed rate assets to their portfolios. NII sensitivity for SG Banks currently stands at SGD4-5m/bp change, or c.3% (DBS) to 7% (UOB) impact to PBT for 100bps change in rates. Other mitigating factors include potentially improved volumes and wealth management opportunities, as well as lower credit cost (CoC). On the non-II front, banks continue to enjoy steady net new money inflows and July’s momentum has been positive. On asset quality, the tone was the same – apart from a few isolated incidences, the banks have not noticed anything systemic.

• Earnings forecasts. We raised FY24F PATMI for DBS by c.3% (FY25F-26F relatively unchanged) while our FY24F-26F PATMI for OCBC was upgraded by 2-4%. All in, our FY24F-26F sector PATMI was revised up by 1-2% pa. We now expect sector 2024F PATMI to rise by 6% YoY, albeit still a moderation from 2023’s +25% YoY. The moderation in growth is mainly due to a more modest +5% YoY operating income growth projection (2023: +21% YoY) on a 3bps NIM squeeze and slower non-II growth.

Source: RHB Securities Research - 23 Aug 2024