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OCBC, DBS, UOB's Q3 results will be scrutinised to see if their 2017 strong rally continues

THE local banks' third-quarter results - with OCBC kicking off on Thursday - will be scrutinised closely to see if their 2017 strong rally still has legs.

United Overseas Bank and DBS Bank will report third-quarter results on Nov 3 and 6 respectively.

Bank stocks have rocketed as much as 30 per cent so far in 2017, almost double that of the benchmark Straits Times Index's (STI).

Year to date, OCBC and DBS have risen almost 30 per cent, while UOB has lagged at a slower 20 per cent. The STI is up 16 per cent.

It's been a bull market, noted one analyst who declined to be named, and who wondered if the bank stocks can move another 30 per cent higher given their property exposure.

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"The mid-cap property stocks have risen 30 per cent in a month, why not the banks?" he posed. Developer stocks such as Lian Beng, Oxley, Heeton and Chip Eng Seng have jumped around 30 per cent from a month ago.

After all, as much as 50 per cent of the banks' loans are in the property market via their mortgages and construction loans, he said.

What investors will look for is the banks' net interest margin (NIM) trends, wealth management income and if there will be more bad debts.

Carmen Lee, head of OCBC Investment Research, said that higher rates should typically be positive for banks, and historically, this has been the trend.

For DBS, its net interest margin has moved up from a recent low of 1.71 per cent in fourth-quater 2016, which was also when the three-month Sibor rate was at recent lows, to 1.74 per cent in the recent two quarters. This was similarly seen for UOB, with its NIM moving from 1.69 per cent in fourth-quarter 2016 and 1.73 per cent in first-quarter 2017 to 1.75 per cent in second-quarter 2017.

For third-quarter 2017, with the improvement in the three-month Sibor, we are also expecting NIM to improve for both DBS and UOB.

During the second-quarter 2017 results, DBS guided for NIM of 1.76 per cent, while UOB guided for flat or better margin.

Overall, we are projecting third-quarter net earnings of S$1189.8 million for DBS and S$788 million for UOB.

Commenting on OCBC, Lim Sue Lin, DBS equity research analyst said to "watch out for NIM trends, non-interest income and provisions and also small one-off gains from disposal of investments".

Taking the cue from Great Eastern Holdings' results, OCBC's non-interest income should be decent, she said.

"Although insurance income contribution would likely be lower quarter on quarter, this would be offset by the improved wealth management business during the quarter, which we understand, should remain strong."

Great Eastern, OCBC's insurance unit on Tuesday posted net profit of S$235.5 million for the third quarter ended Sept 30, 2017, 21 per cent higher than last year's S$195 million.

For the nine months ended Sept 30, the group's net profit was S$732.9 million, up 86 per cent from the same period a year ago.

"This increase was due to higher operating and non-operating profit, as well as higher profit from shareholders' fund's investments," the company said.

Ms Lim said that there should be no surprises in OCBC's expense trends with cost-to-income ratio ranging at 40-45 per cent.

"Its NIM however could be flattish. While Sibor/SOR-related loans could start to see some repricing, its Hong Kong book may still dent NIM marginally due to the differential in the movement of its loan and deposit pricing (the relative movement of the one-month and three-month Hibor). Sibor/SOR and Hibor are the key wholesale interest rates in the interbank markets of Singapore and Hong Kong respectively.

Ms Lim has a buy on OCBC with a target price of S$12.80. It closed on Tuesday at S$11.46.

She also has a buy on UOB with a target price of S$26.90, saying the stock is "ready for lift off".

UOB has lagged its peers year to date and more evidently post second-quarter 2017 results, she said.

"Expect a strong set of third-quarter 2017 earnings," she said.

We expect third-quarter results to be stronger with a further improvement in NIM and more importantly, a pick-up in loan growth due to the recovery of the property market, said Ms Lim.

Corporate loan growth, particularly from property developers, is likely to drive loan growth for the third-quarter. As there may be a few more blips on the asset quality side, albeit in a much smaller quantum versus a year ago, specific provisions may still stay relatively high. Cost-to-income ratio will likely ease as revenue growth picks up.

"We believe it is time for its fortunes to turn based on three catalysts," she said.

The three catalysts are the property market recovery, NIM improvement and while concerns of asset quality may linger, the quantum of new non performing loans has eased.

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