Singapore banks report 2Q09 between 3-7 August. NIMs will improve YoY from better loan pricing and benign funding costs even though gapping profits will be absent from a flat yield curve. Non-interest income should see upside from the revival of capital markets. Yet our checks indicate still rising NPLs, which means credit charges will continue expanding QoQ. Here we expect OCBC to surprise on the negative. Wide Prime-HIBOR spreads should underpin a positive operational surprise for DBS.
Focus on asset quality and provisions
Our checks with the Singapore banks point to rising NPLs, both domestically as well as in their overseas operations
Recall NPLs increased 56% YoY in 1Q09 alone; with macro conditions remaining stressed we expect this pace to pick up going in to 2Q09
The banks believe this NPL cycle will be drawn-out compared to the Asian Crisis given government backstops. Negative, as this means provisions will also be long
Our key concern is OCBC, who saw aggressive SME loan growth in the bull-cycle Also, DBS whose North Asia exposure has been particularly vulnerable.
Hence, expect credit charges to expand going in to 2Q. We expect FY09 to see 143bps vs. 65bps in FY08. Recall DBS saw 124bps and UOB 148bps in 1Q09 alone
Resilient NIMs
Funding costs remained low in 2Q09, while banks have priced up their corporate/SME books especially in Singapore; positive for NIMs YoY
The weak spot is Malaysia for both UOB and OCBC where Bank Negara has aggressively cut benchmark rates. Wide Prime-HIBOR should be a key DBS positive
A relatively flat short end in the yield curve means limited gapping opportunities
Hence, while we expect NIM growth to remain positive YoY, expect a slower pace
Loan volumes should continue to retreat QoQ, with UOB the key laggard given Management’s conservative attitude
Positive on non-interest income
With equity volumes up 83% QoQ expect brokerage to post a strong QoQ result
Better valuations should also provide upside for fund management fees
Rising equity valuations should provide upside in mark-to-market gains at Great Eastern. Recall 42% of the Life fund AUM is equities
Volatility in FX, government and corporate securities will support trading income QoQ much like banks globally
Yet domestic demand fees, especially wealth management, loan fees and trade fees should remain under pressure
High QoQ government securities yields will see mark-to-market pressure on DBS’ and OCBC’s AFS books, although lower corporate yields should somewhat offset this
UOB top pick, SELL OCBC
UOB remains our top pick given a better quality loan book. Hence a candidate for an early write-back cycle given the Group’s early provisioning strategy
OCBC saw a jump in substandard NPLs in 1Q09 pointing to rising cautiousness. We expect this trend to strengthen driving higher credit charges QoQ. The only positive we see is Great Eastern, but this will not be enough to offset higher provisions. Hence we expect earnings risk to be on the negative for 2Q09. SELL
Wide Prime HIBOR spreads and Management’s efforts to price up Singapore loans should see DBS surprise operationally. Provisioning though will be a wildcard