Singapore banks off to a strong start in Q1, beating estimates and with an eye on M&A
Trio expecting to get a lift from global economic recovery, with loan growth to pick up as business activity gains momentum
Singapore
SINGAPORE banks kicked off the year with a solid quarter that beat analyst expectations on stronger fee income and lower credit costs, following a pandemic-struck 2020.
Looking ahead, the trio is expecting to get a lift from the global economic recovery this year, with loan growth to pick up as business activity gains momentum, even as bank chiefs cautioned that the stellar first quarter results could be "exceptional".
In a note, DBS's equity analyst Lim Rui Wen warned: "Larger-than-expected NPLs (non-performing loans), as well as a worse-than-expected Covid-19 pandemic situation globally, could unwind expectations of credit cost and NPL declines, thus posing risks to earnings."
Even with the worst of Covid-19 seemingly behind and credit costs stabilising, only DBS joined global banks around the world writing back past provisions on a more bullish outlook. OCBC and UOB took a more conservative approach as uncertainties remain.
Jefferies' banking analyst Krishna Guha stayed positive on the banks in part due to hopes of writebacks on general provisions that may materialise if the economic conditions stabilise.
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"Overall, the results and commentary provide a constructive backdrop," he told The Business Times.
"Guidance has been maintained or improved in certain cases which is comforting."
In the next few quarters, key areas to watch out for are loan growth and pricing trends and how they evolve if financial conditions tighten, as well as asset quality when relief measures roll off, added Mr Guha.
Singapore banks struck a note of cautious optimism in their outlook, given the flare-ups in Covid-19 in certain markets as well as moratoriums that have not completely unwound.
DBS' chief Piyush Gupta noted that the outlook in Hong Kong will be unclear for a longer period as the authorities there have extended the moratorium into 2022. Most of its moratoriums are in Hong Kong, where such loans are now down to S$2.8 billion, from S$6.5 billion in the middle of last year.
For DBS, there is about S$400 million worth of loans under moratorium in its SME book which will come off at the end of June, compared with S$5 billion at the start of 2020.
There is also another S$5 billion worth of government-backed loans, but Mr Gupta said that the bank will only know in the second half of this year what delinquencies will look like.
UOB's loans under moratorium have remained unchanged from January with about 6 per cent, or S$18 billion, of the bank's total loan book under relief.
As for OCBC, CEO Helen Wong said the bank has seen "healthy repayment trends" following the expiration of Covid-19 relief measures and that she does not expect a huge provision size for the next three quarters. She maintained the earlier guided credit cost estimates of 100-130 basis points, but this will be on the lower side.
Even as all three banks saw significant drops in bad loan provisions this quarter, only DBS made a write-back of S$190 million.
UOB's chief financial officer Lee Wai Fai said that it is "a little bit too premature" to write back provisions at this point as the various relief measures still in place may have a "lagging impact" on NPLs.
"If you look at the uncertainty that we have, I don't think that we have fully recovered. We wanted to be more cautious," he said on Thursday.
As for OCBC, its chief financial officer Darren Tan said that the bank has "no intention whatsoever at this point in time" to make writebacks, but will explore that option when the outlook becomes clearer.
DBS - the first among the banks to kick off earnings season - powered through a 72 per cent year-on-year (y-o-y) rise in Q1 net profit to S$2.01 billion. South-east Asia's largest bank "fired on all cylinders", with strong loan and deposit growth, a new high in fee income with record wealth management fees, and a surge in treasury income, said Mr Gupta.
As the only bank of the trio to offer quarterly dividends, DBS declared an interim dividend of 18 Singapore cents per share. This is lower than 33 Singapore cents in interim dividend declared for the same period of 2020, but that payout was made prior to the dividend cap as nudged by the regulator.
OCBC on Friday more than doubled its net profit, hitting a new high in fee income while making a far smaller allowance compared with the year-ago period. Net profit for the first three months ended March 31, 2021 stood at S$1.5 billion, compared with S$698 million in the year-ago period.
This primarily came from robust insurance income, which jumped to S$422 million, compared with S$106 million from the year-ago period, largely due to mark-to-market gains from favourable market conditions. Trading income also rose several times to S$316 million from S$18 million in the year-ago period.
As for UOB, it posted an 18 per cent rise in net profit for Q1 on record fee income. Net profit for the first three months ended March 31, 2021 stood at S$1.01 billion, compared with S$855 million in the year-ago period.
Having beaten estimates, the trio has also said they are now open to M&As. Citi has said it would shed assets in 13 consumer markets, with many of these being key markets for Singapore and Asia-focused banks. The consumer markets include Indonesia, Malaysia, Taiwan, Thailand, Vietnam, India and China.
This comes as DBS, OCBC and UOB reported strong common equity tier one (CET-1) ratios of 14.3 per cent, 15.5 per cent and 14.3 per cent respectively, well above the target operating range of 12.5-13.5 per cent. This gives the banks ammunition for any potential mergers and acquisitions, and a strong buffer from any potential financial stress.
With the competition for Citi's assets expected to be stiff, competition among the Singapore banks is heating up too in the Greater Bay Area, especially as both DBS and OCBC have clear plans to expand there.
DBS threw down the gauntlet with its recent purchase of a 13 per cent stake in Shenzhen Rural Commercial Bank for 5,286 million yuan (S$1.08 billion), and is now the largest shareholder of the Chinese bank.
Mr Gupta called the partnership with Shenzhen Rural Commercial Bank a "game changer" as it will bring 170,000 SME customers from across the board. DBS is seeking to go deeper into the supply chain by leveraging its digital capabilities into the customer base, as well as provide international services for the customers.
The bank will also be looking at wealth connectivity as it opens up, he added.
On Friday, OCBC's Ms Wong acknowledged that there will be "very strong competition" in the Greater Bay Area, but believes that the market is big enough for all parties to do "reasonable business".
As for UOB, the bank had previously said that its focus is to capture greater connectivity flows between Asean and Greater China.
On Friday, shares of DBS closed up 29 Singapore cents or 0.98 per cent to S$29.86; OCBC rose 16 Singapore cents or 1.29 per cent to S$12.56; and UOB gained 55 Singapore cents or 2.11 per cent, to end at S$26.58.
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