Singapore banks likely to post record earnings for full year 2018

Loans growth modest, but margins higher; analysts expecting higher dividend payout


THE three Singapore banks are expected to announce record full year 2018 earnings in their upcoming Q4 results with modest loans growth amid higher margins.

Eagerly anticipated will be an announcement of higher dividends from United Overseas Bank (UOB) and perhaps also from OCBC Bank; also the 2019 prospects by the banks' chiefs will be dissected and analysed given that worries are building that economic growth this year may be less rosy.

DBS Bank will report Q4 and full year 2018 results on Feb 18, followed by OCBC and UOBon Feb 22.

For full year 2018, DBS, OCBC and UOB are expected to deliver record net profit of S$5.7 billion, S$4.7 billion and S$4.1 billion respectively, according to Bloomberg estimates.

For Q4, DBS, OCBC and UOB could post net profit of S$1.35 billion, S$1.21 billion and S$1 billion according to the average estimates of two analysts.

"Interest will be on growth projections and upside/downside risk to them. We will also look out for credit cost and operating expense guidance," said Krishna Guha, Jefferies analyst.

"We expect results to be broadly in line for UOB and OCBC, but potential ROE (return on equity) disappointment for DBS," said Robert Kong, Citi analyst.

Challenging 4Q18 markets will impact wealth management/trading income, Mr Kong said.

"Loan growth still robust yoy (year-on-year), but softening momentum qoq (quarter-on-quarter), indicating a more subdued loan growth outlook into 2019," he said.

While the industry's loans growth has been tepid, the three local banks will enjoy decent growth from mortgages, corporate and regional lending.

Bank lending in Singapore was flat in December 2018 from a month ago on broad weakness across both business and consumer loans, preliminary data from the Monetary Authority of Singapore showed.

Loans through the domestic banking unit - which captures lending in all currencies, but reflects mainly Singapore-dollar lending - stood at S$671.7 billion in December, compared with S$671.9 billion a month ago.

From a year ago, total lending rose 3 per cent.

Singapore dollar loans may be flat but the local banks have significant overseas lending, said Rui Wen Lim, DBS group research analyst.

Ms Lim also said as mortgages' loan growth continues to slow following last year's property cooling measures, "we believe that committed property developments (new developments and enbloc developments alike) remain in the pipeline of Singapore banks' through at least 1H2019.

"New mortgages committed will also continue to see progressive drawdown towards completion of development. Infrastructure projects such as construction of Terminal 5 at Changi Airport could add to the upcoming loan pipeline into FY2020. We posit loan growth to moderate to about 6 per cent going into FY2019."

Maybank Kim Eng (MKE) analyst Thilan Wickramasinghe expects 2019 loan growth of 5.8 per cent year-on-year (YoY), which is expansionary, albeit at a slower pace than the estimated 8 per cent YoY in 2018.

MKE's economics team forecasts GDP growth for Singapore of 2.2 per cent in 2019 down from projected 3.2 per cent in 2018. The team also expects slower growth in the rest of South-east Asia.

"However, none of these forecasts point to a contraction, just slower growth. For countries such as Indonesia, Thailand, and Malaysia - where the Singapore banks have overseas operations - continued expansion in domestic consumption together with some expected election pump priming and infrastructure investments should support GDP growth, according to the MKE Eeonomics team."

Mr Wickramasinghe added that for full year 2018, DBS, UOB and OCBC are projected to show loans growth of 6.3 per cent, 8.9 per cent and 8.8 per cent respectively.

The banks' net interest margins (NIM), are also expected to rise in line with global rate hikes, with DBS - having the largest amount of deposits - to benefit the most.

The key 3-month Sibor or Singapore interbank offered rate has been on a rising trend, hitting a Q4 2018 average of 1.73 per cent, up from Q3 2018's 1.63 per cent, said RHB group analyst Leng Seng Choon.

"It is currently 1.89 per cent," said Mr Leng. "There is some lag effect from the Sibor rise to filter through to NIM widening. Nonetheless, we believe DBS' 4Q18 NIM would have widened from 3Q18's 1.86 per cent. We forecast a higher 2019 NIM of 1.92 per cent, premised on a gradually rising US Federal funds rate."

With competition among local and foreign banks for fixed deposits and some now paying more than 2 per cent for a 6-month fixed deposit, the path to NIM expansion is not a given.

"Path to NIM expansion not as straightforward as expected," said DBS' Ms Lim.

OCBC had flattish NIM trend for five quarters up to 3Q18 in part due to excess USD liquidity amassed in 2H17, she said. In 3Q18, OCBC posted a 5 basis points (bps) improvement qoq where it started to reprice its loan book as it released excess US dollar liquidity amassed in 2H17.

On the other hand, UOB saw a 2bps decline in NIM in 3Q18 as it took an active decision to build up its SGD deposits during 3Q18 in anticipation of more competition towards year end, she said.

"Singapore banks might see cost of funds spike up in certain quarters where, for instance, tactical funding decisions are made," said Ms Lim.

On costs, analysts are watching to see the results of the banks' automation drive on delivering efficiencies.

They are also hoping for higher dividends.

"UOB's management has indicated its intention to lower CET1 CAR (from 3Q18's 14.1 per cent)," said Mr Leng.

CET1 CAR refers to common equity tier 1 capital adequacy ratio.

"We believe that UOB could be paying more dividends in 2H2018 compared with 1H2018, with its new dividend payout ratio of about 50 per cent of net profit subject to the minimum CET1 ratio of 13.5 per cent and sustainable business performance," said Ms Lim.

UOB paid a 50 cent dividend per share in 1H2018.

Ms Lim believes there is a case for OCBC to "nudge up its dividend payout levels", given that its payout ratio of about 37 per cent has lagged peers.

Maybank KimEng's Mr Wickramasinghe said: "Continued dividend growth should support a sector dividend yield of 6 per cent in 2019, which is at the higher end of banks in South-east Asia."


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