DBS shone in the first round of quarterly results, with OCBC a close second and UOB in third place. A significant QoQ uptick in NIM was the major surprise.

Greater China provided a strong earnings kicker to DBS and OCBC in 1Q14. Operating trends stayed positive.

Maintain Overweight on banks. DBS remains our top sector pick, followed by UOB. Stay cautious on OCBC.

Greater China provides the heavy lifting

Strong earnings beat amid challenging capital markets stood out as the most impressive thing about Singapore banks’ 1Q14 results. In our view, DBS performed the best in terms of operational improvements, characterised by a strong 5bps QoQ increase in net interest margin (NIM), robust fee income and improving asset quality. Notably, Greater China provided the earnings kicker, giving a partial boost to NIM and lifting fee income. During the quarter, DBS was the largest beneficiary with PBT surging 66.5% QoQ to SGD453m, accounting for 35.6% of group PBT.

Positive undertone to sustain

Industry NIM was the major surprise, posting a decisive 4bps QoQ uptick to 1.70%, its highest in six quarters. The improvement came from better pricing for trade (on tighter liquidity conditions in China), housing and commercial loans. However, both DBS and OCBC expect NIM to soften somewhat in 2Q14 as the higher rates in China look unsustainable even though there have been no signs of asset quality risk. Banks continued to keep their SGD balance sheets liquid, especially DBS whose SGD loan-to-deposit ratio stood at 73% compared with OCBC’s 79% and UOB’s 95%.

Raise TP on higher EPS forecasts. We raise our FY14E-16E EPS forecasts by up to 15% after factoring in better NIM, larger fee income and lower credit charges. Accordingly, our TPs for all three banks go up by close to 4%.

Maintain Overweight on banks. For exposure, DBS is our top pick as it is best positioned to take advantage of a rising interest rate environment. We would remain cautious towards OCBC.  

Source: Maybank Kim Eng Research - 6 May 2014