Broker’s Call: Singapore Banks’ Q1 2023 Earnings – Outlooks to Drive Share Prices

Singapore bank stocks have been local investors’ favourite choice on the back of rising interest rates and their profitable loan books.

Indeed, over the past year, the share prices of DBS Group Holdings Ltd (SGX: D05), United Overseas Bank Ltd (SGX: U11), and Oversea-Chinese Banking Corporation Limited (SGX: O39) have all outperformed the US stock market benchmark – the S&P 500 Index.

With 12-month share price returns of -1.2%, -1.1%, and +7.4%, Singapore’s banks have comfortably beaten the -5.8% decline in the S&P 500 Index.

CGS-CIMB Analyst take

But with talk of “peak rates” and rising funding costs, what should investors be watching for as Singapore’s big banks report their Q1 2023 earnings in the coming weeks?

The short answer? We see mixed net interest margin (NIM) performance given the higher funding cost environment.

BUT we also think the big boys will benefit from strong wealth inflows in the first quarter as the city state is traditionally seen as a haven amid global volatility.

Overall, the team at CGS-CIMB Securities reiterates our “NEUTRAL” stance on the sector and – as tends to be the case in earnings season – the banks’ share prices are going to be driven by the all-important outlook from management rather than the actual numbers from the past quarter.

Wealth = health for Singapore’s bank stocks

We expect a modest set of numbers from DBS, UOB and OCBC in their Q1 2023 earnings.

Instead, what’s going to drive the stocks are any changes from management on the outlooks for credit demand, risk appetite, and asset quality – so watch those closely as investors focus less on margin expansion.

We have a slightly mixed read on banks due to their differing NIM profiles and wealth management divisions.

Overall, we expect loan growth to be pretty muted given weak investment sentiment and continued loan repayments.

Having said that, we think strong wealth inflows will provide the dry powder to beef up their wealth management products in readiness for when risk sentiment improves.

DBS Q1 2023: More NIM upside

We expect Singapore’s biggest bank to post Q1 2023 net profit of S$2.3 billion – up 27% year-on-year but down 2% on the quarter.

Loan growth will likely be modest – expect just 1% growth on the quarter – as corporate loans make up for the subdued consumer demand.

On the NIM front, we think this growth slowed during the quarter. We foresee it nearly halving to 8 basis points (bps) from the 15bps expansion in Q4 2022.

Wealth management inflows – while likely strong during Q1 2023 on the back of banking sector volatility – will likely be offset by weak income for the division as risk sentiment remains on the negative side.

DBS has minimal US and European exposure and there are no impairments needed for its debt investment portfolio.

OCBC Q1 2023: Expect some mark-to-market recoveries

Net profit for OCBC likely hit S$1.55 billion in Q1 2023. Loan growth for the bank? Likely flattish – just like the rest of the Singapore banking industry, so we foresee a 0.5% quarter-on-quarter expansion.

Investors should note that OCBC actually recorded an accelerated NIM pace over FY2022 (a 79bp cumulative increase versus DBS and UOB at around 62-66bp).

Most likely the big takeaway for OCBC, at least in our view, will be the smaller inversion of the yield curve. Why does that matter?

Because of its holding in insurer Great Eastern Holding Limited (SGX: G07). The smaller inversion could result in some market-to-market (MTM) recoveries from its Great Eastern portfolio.

UOB Q1 2023: Weaker NIM but stronger wealth

Finally, for UOB we foresee the bank posting net profit for Q1 2023 of S$1.5 billion – so up 8% quarter-on-quarter and an increase of 67% year-on-year.

In contrast to DBS and OCBC, we see UOB’s loans contracting 1% quarter-on-quarter amid muted demand and more corporates paying down their debt.

NIMs likely contracted for UOB – we see a 6% drop on the quarter as higher funding costs got priced in while asset yields stayed flat.

Don’t fret though. We highlight that the margin decline could reverse in Q2 2023 as asset yields track the Fed’s rate hikes during February to March.

These weaker trends more broadly could be offset by strong fees from UOB’s wealth management customers. The segment is starting to deploy their dry powder amid a broad-based renewal of business activity.

Treasury income for UOB was likely strong on the back of sustained hedging activity.

Singapore banks’ outlooks to be key

After a massive quarter of news flow for the global banking sector in Q1 2023, Singapore’s banks are likely to report relatively in-line (and drama-free) earnings.

That’s positive for investors in Singapore. However, we should be watching the comments from the DBS, UOB, and OCBC management teams on where they see asset quality.

This along, with their comments on the prospects of growth in wealth management and loans, will be the key drivers of Singapore banks’ stock prices post-earnings.

Disclaimer: CGS-CIMB Securities Banks Analyst Andrea Choong doesn’t own shares of any companies mentioned.