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Singapore banks' healthy trading revenue to cushion hit to margins: Jefferies

JEFFERIES Research on Monday flagged that steep declines in interbank rates were likely to weigh on the three Singapore banks' margins and revenue, although they will see some offset from a healthy trading print.

In a research report, equity analyst Krishna Guha added that the lenders' provisions are likely to stay elevated, as reserve build-ups negate the absence of outsized specific allowances.

"Key things to watch are signs of a bottoming out of margins, any tone-down on dividend, and future growth outlook especially for regional non-trade and deal-related loans," he wrote. 

DBS and UOB will release their second-quarter results on Aug 6 for the three months ended June 30, 2020, while OCBC will release its results on Aug 7.

The three-month interbank rates for the US dollar to the Hong Kong dollar and the Singapore dollar for the second quarter of this year sank about 90 basis points (bps) sequentially, while regional rates were down 40-60 bps.

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"Interbank rates have further come off in July. While this will weigh on margins, banks are likely to benefit from lower deposit rates. As such, Q2 may mark the bottoming out of quarterly net interest margins," Mr Guha wrote.

Up until May, system loans for Singapore had declined 2.3 per cent quarter to date, driven by business and consumer loans. Nonetheless, on the year, loans grew 3.4 per cent, mainly driven by business loans even as consumer loans shrank by 3 per cent.

Mr Guha said Singapore's ongoing "circuit breaker" will likely weaken fees from cards, wealth management and bancassurance, although market-linked and insurance revenue is likely to improve amid better market conditions and a steeper yield curve.

He expects Q2 margins for the banks to decline 11 to 26 bps quarter on quarter - least for OCBC and most for DBS.

Loan growth for all three banks is likely to range from 1-2 per cent quarter on quarter, driven by regional non-trade corporate loans.

Annuity fees will likely soften quarter on quarter, but "resilient" trading revenue should result in quarter-on-quarter revenue growth for DBS (+5 per cent) and OCBC (+1 per cent), and limit the decline for UOB to 3 per cent, Mr Guha said.

All in, Jefferies expects Q2 net income to grow 5 per cent on the quarter for DBS and surge 34 per cent for OCBC, but fall by 11 per cent for UOB.

The increase for OCBC will be mainly boosted by insurance, while the softness in UOB will be due to higher provisioning expenses, Mr Guha said.

He expects dividends to amount to S$0.30 for DBS for the second quarter, S$0.23 for OCBC for the first half of the year, and S$0.50 for UOB for the first half.

On Monday, Jefferies raised the target prices (TPs) for the trio on higher multiples and earnings from higher non-interest income.

The new TP for DBS Group is S$24.50, up from S$22.50. It is S$22 for United Overseas Bank (UOB), up from S$19, and S$8.88 for OCBC Bank, up from S$8.40. Jefferies maintained its calls on the banks' stocks: "buy" for DBS and "hold for UOB and OCBC.

At Monday's close, shares of DBS fell S$0.09 or 0.4 per cent to S$21.29, UOB ended S$0.01 or 0.05 per cent lower at S$20.55, while OCBC rose S$0.01 or 0.1 per cent to finish at S$9.18.

Earlier this month, CGS-CIMB said the three lenders' upcoming dividend payouts are likely to depend more on the earnings impact from the current operating environment amid pre-emptive provisioning and net interest margin headwinds.

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