Singapore banks set for expansion in net interest margins, higher dividends in 2022

Singapore

AS higher interest rates loom, Singapore banks are poised to make more money from lending this year, with the current liquidity flush providing a further bump to net interest margins (NIMs) - a key measure of profitability.

Higher dividend payouts are also on the cards due to the sector's strong capital levels and a benign credit cost outlook.

CGS-CIMB analyst Andrea Choong said there is now a "clearer trajectory" for NIM expansion given the sensitivity of local banks' portfolios to USD rates and the Federal Reserve's earlier-than-expected tightening cycle.

The brokerage has raised the sector's NIM estimates by 2-13 basis points (bps) to 1.46-1.68 per cent through 2023.

As at Q3 2021, DBS's NIM stood at 1.43 per cent, OCBC's at 1.52 per cent, and UOB at 1.55 per cent.

UOB previously guided that a 25 bps short-term rate hike could lift its NIMs by 3-4 bps. DBS and OCBC earlier said a 100 bps lift in interest rates could add up to S$2 billion and S$805 million, respectively, to net interest income.

The Fed has forecast 3 hikes this year - broadly expected to kick off in March - and another 3 in 2023 in an aggressive push to stem inflation.

During the last rate hike cycle from 2016-2018, Singapore's banking sector saw average NIM expansion of 10-17 bps as well as improved profitability and higher return on assets.

In the new cycle, flush liquidity conditions could result in amplified NIM expansion as relatively low funding costs sustain for now, given the lack of need to compete for deposits, said Choong.

The sector recorded higher CASA (current acccount savings account) ratios of 55-70 per cent in Q3 2021, compared to 43-60 per cent during the previous rate hike cycle.

Among its peers, DBS is widely expected to be the key beneficiary of the Fed's tightening measures.

As at Q3 2021, the lender is estimated to have around 79 per cent of its loan book exposed to SGD, HKD and USD, compared to 63 per cent at UOB, according to an OCBC Investment Research report.

DBS also has a sector-leading SGD CASA ratio of 94 per cent as at mid-2021. Its CASA ratios for HKD and USD are estimated at 77 per cent and 65 per cent respectively.

But even as DBS sees relatively higher sensitivity to rising rates, there is better valuation proposition in UOB which has lagged last year due to Covid-led concerns in its key Asean markets, the OCBC report said. "This should improve in 2022 as Asean region gradually re-opens, which bodes well for asset quality trends."

Choong cautioned that a "swift and significant" outflow of CASA into fixed deposits or other high-yielding products could impede NIM expansion for the sector.

A longer time taken for the pass-through of rate hikes into NIMs, beyond the expected 6 to 9 months, could also dent growth, she added.

DBS analyst Lim Rui Wen is expecting further upside to dividends due to the banks' strong capital levels, though they may wish to retain some excess capital for growth and/or further corporate actions.

"We believe banks may adjust high capital buffers through special dividends in 2022, or higher dividend payout policies post-2021 may also be an avenue to distribute excess capital," she said.

In Q2 2021, DBS and UOB both resumed their pre-Covid dividend policy, while OCBC retained its 42 per cent dividend payout ratio from the previous year.

Ahead of the sector's upcoming fourth-quarter results, Citi analyst Robert Kong noted that a "clear dividend policy statement" from OCBC could be a key catalyst, given the lender's high Common Equity Tier 1 ratio of 15.5 per cent.

"OCBC has suffered lingering asset quality concerns but we expect it to turn the corner in 2022," he added.

Across the sector, NIMs are expected to stabilise at near-current levels for 2021 as banks continue to manage out more expensive deposits into Q1 2022, said Lim.

Choong guided for Q4 2021 earnings to be seasonally weaker as wealth and trading income slows.

Notably, OCBC and UOB saw some weakness in Malaysia in Q3 with higher loans under relief, non-performing loans (NPLs) and provisions. UOB has guided for NPL ratio to inch up to 1.7-1.8 per cent in 2022, from 1.5 per cent.

The banks also have small loan exposures to China's rocky property sector.

Still, strong provisions will mitigate such regional risks as banks are able to buffer the specific provisions taken where needed, said Lim.

Ample provisions may also pave the way for credit cost writebacks - a potential earnings driver in the new year.

"Q4 is typically a seasonally softer quarter. What will matter more will be 2022 guidance. We expect positive updates on NIM expansion and net interest income growth, and the re-confirming of a benign credit cost outlook," said Kong.

DBS will kick off the earnings season on Feb 14, followed by UOB on Feb 16 and OCBC on Feb 23.

DBS shares closed at S$36.85 on Thursday, shedding 13 cents or 0.35 per cent, while shares in UOB were down 26 cents, or 0.79 per cent, at S$32.54. OCBC shares were up two cents, or 0.15 per cent, at S$13.24.