Singapore banks optimistic on economic recovery, rate hikes

[SINGAPORE] Banks are sounding an optimistic note heading into 2022, with the global economic recovery and interest rates hikes among the bright spots.

Their latest results also show growth in both customer loans and deposits, as well as higher CASA (current account and savings account) ratios, so analysts are forecasting better net interest margins (NIMs) this year.

DBS, the first to kick off the earnings season on Feb 14, reported full-year loan growth of 9 per cent in 2021 - the highest in 7 years - which mitigated some impact of last year's low-interest-rate environment.

Chief executive Piyush Gupta had said during a media briefing that the bank was able to deliver record profits last year despite a collapse in interest rates, which had wiped out some S$3 billion in net interest income (NII) since the pandemic hit.

DBS and OCBC reported lower NII for FY21 - down 7 per cent and 2 per cent respectively. UOB charted a rise of 6 per cent in NII during the year, led by loan growth of 10 per cent; its NIM was stable.

With the US Federal Reserve expected to kick off its interest rate hikes from March, DBS has guided for an upside of S$1.8 billion to S$2 billion in NII for every 100 bps rise in interest rates.

UOB, which reported its earnings on Feb 16, also said the impending interest rate hikes would likely bode well for earnings in the coming quarters. It believes that the rate increases will be gradual and that credit quality will not be significantly affected.

Chief executive Wee Ee Cheong said at a media conference following the earnings: "We believe the worst is behind us. In Singapore, we see market recovery and improving consumer sentiment. In South-east Asia, green shoots of recovery are strengthening."

For the quarter ended Dec 31, 2021, all 3 banks reported year-on-year growth in net interest income and non-interest income.

DBS' net profit grew 37 per cent to S$1.39 billion; UOB's net profit was up 48 per cent to S$1.02 billion.

However, OCBC's Q4 net profit - released on Wednesday - fell 14 per cent to S$973 million, missing the S$1.18 billion average estimate based on 4 analysts polled by Refinitiv.

The lower profit came on the back of higher operating expenses - 15 per cent above the previous year at S$1.29 billion - due to higher staff costs linked to strategic expansion and business activity growth, and absence of government job support grants.

Thilan Wickramasinghe, head of research, Singapore, at Maybank IBG Research, said the banks' Q4 results were reasonable, with no standouts vs expectations, and management outlooks for 2022 have been largely positive.

"We think the banks should continue to deliver growth, supported by rising interest income and falling credit costs," he said. "However, risks from China's 'common prosperity' policy, as well as the current geo-political tensions between Russia and Ukraine, needs close monitoring in terms of asset quality and contagion across sectors the banks are active in."

For the full year, OCBC's net profit was up 35 per cent on-year, in line with the results of UOB and DBS, which reported full-year net profit rising 40 per cent and 44 per cent respectively. All 3 banks recorded double-digit growth in net fee incomes for FY2021, amid increase in customer activities.

OCBC's improved full-year profit came on the back of strong growth in non-interest income and lower allowances, which offset a decline in net interest income amid a low-interest-rate environment.

The bank's chief executive, Helen Wong, said she is "cautiously optimistic" about economic recovery. "I do hope that Omicron is the final disruptive phase of this pandemic, and Covid-19 evolves into a liveable endemic," she said, noting that there are still headwinds such as inflation, geopolitical tensions, supply-chain disruptions and rising energy prices.

The bank expects the impending interest-rate hike to provide a gradual uplift in interest income. A 1 per cent raise over the year would increase net interest margin by about 18 basis points, or close to S$700 million in income.

For 2022, OCBC has guided for NIM to come in at about 1.5 to 1.55 per cent, and it expects loan growth to be in mid-to-high single digits.

OCBC's customer loans grew 8 per cent in 2021; customer deposits were up 9 per cent over the same period, with CASA ratio improving to 63.3 per cent from 60.3 per cent in December 2020. The other banks made similar improvements.

Deposit growth has been "spectacular", DBS' Gupta said at its results briefing. The bank's CASA rose 12 per cent year on year to S$381 billion in 2021, raising CASA ratios up to a record 76 per cent.

Maybank's Wickramasinghe said in a note following the earnings that the high CASA base gives DBS a "significant low-cost funding advantage in a rising rate environment". He noted that DBS marginally missed 2021 earnings, but that Maybank believes this to be "largely a timing mismatch with NIMs not yet reflecting higher interest rates".

Wickramasinghe also said UOB is well-positioned to benefit from rising interest rates, with a sizable CASA base and leading market share in SMEs (small and medium-sized enterprises), which give it better pricing power. UOB's CASA ratio rose to a new high of 56.2 per cent in the 4th quarter.

Maybank is forecasting NIMs to rise 11 basis points for UOB and 18 basis points for DBS in 2022.

RHB analysts also raised their net profit forecasts last week for UOB and DBS in FY22 and FY23 in view of higher NIMs.

The local banks have raised their total dividends for FY2021, following the lifting of dividend caps by the Monetary Authority of Singapore last July.

DBS' total payout for the year - including a proposed final dividend of S$0.36 - has increased to S$1.20 from S$0.87 in 2020. OCBC's proposed final dividend of S$0.28 takes its total dividend to S$0.53 from S$0.318 a year earlier; UOB's full-year dividend has risen from S$0.78 to S$1.20, including its proposed final dividend of S$0.60.

DBS' Gupta said there was sufficient capital to return more dividends to shareholders, but payouts were moderated down due to MAS' latest capital requirement imposed on the bank. The regulator had on Feb 7 ordered DBS to set aside S$930 million more in regulatory capital as penalty for its multiple-day digital banking outage last November.

OCBC Investment Research analysts noted that DBS' proposed final dividend was 9 per cent higher, a positive surprise, and signals management confidence in the bank's growth outlook.

Maybank's Wickramasinghe also noted: "With three big recent acquisitions to digest, we believe DBS has increased room for higher dividend payouts rather than expending additional capital for growth."

Meanwhile, Jefferies equity analyst Krishna Guha noted that OCBC's restoration of its dividend to pre-pandemic levels was positive, but "still underwhelming", given its 15.5 per cent Common Equity Tier 1 ratio.

The lack of comments on a dividend policy was also "a dampener", he said, but added that the excess capital would be handy for defensive and offensive purposes.

On Wednesday, shares of DBS closed at S$36.50, up 0.7 per cent; UOB rose 0.6 per cent to S$32.38; and OCBC fell 4.6 per cent, to end at S$12.56.