Five things to note following UOB’s Q2 results and what it may mean for OCBC and DBS

United Overseas Bank Limited (UOB) has released its quarter two (Q2) earnings, which saw a 11% year-on-year (YoY) increase in net profits with the heavy-lifting done by its net interest income as expected. Its share price jumped slightly higher when the market opened this morning, before retracing its gains with some sell-the-news sentiments playing out.

Here are five things to note following UOB’s Q2 results and what it may mean for Oversea-Chinese Banking Corporation, Limited (OCBC) and DBS Bank Limited (DBS).

Upward reversion in net interest margins with further improvement expected

Riding on the interest rate upcycle, UOB’s net interest margins (NIM) have seen an 11 basis-point (bp) improvement from a year ago, lifting its net interest income by 18% YoY. This reinforces the fact that NIM have bottomed, with further repricing of loans ahead expected to drive further margin expansion. A look at the average of both the 3-month Singapore Overnight Rate Average (SORA) and 3-month Singapore Interbank Offered Rates (SIBOR) have revealed an ongoing surge in borrowing costs, with likelihood to surpass pre-Covid levels as tightening continues to be underway. A 125 bp hike from the Federal Reserve (Fed) in quarter three (Q3) is currently being priced.

Looking ahead, DBS may have greater room for an upward reversion in NIM compared to the rest, considering that its NIM tends to be higher during normalised times while the Covid-19 impact has left its NIM trailing behind the other banks at 1.46%. Nevertheless, the net interest income (NII) portion should see a strong double-digit improvement across all three banks. OCBC has previously guided that a 100 bp parallel rise in yield curves could increase net interest income by an estimated S$669 million, or approximately 11.4% of its 2021 NII. DBS is the clear forerunner, as it is estimated that a 100 bp increase in the US Fed Funds rate will increase NII by between S$1.8 billion and S$2.0 billion.

Loan growth remains resilient but will momentum from economic reopening fade?

Overall loan growth from UOB has remained resilient with a 0.6% growth from the previous quarter with economic reopening, but some sell-the-news could surface on expectations that the resilience in loans for Q2 may fade over the coming months. A downtick in Singapore’s bank lending data towards the latter half of Q2 could be early signs of moderating loan figures ahead – its first since November 2021. Nevertheless, despite lingering growth concerns, loan loss provisions in Q2 remains stable for UOB. A lesser extent of build-up could play out for Singapore banks, considering that they have been prudent in releasing its loss allowances from Covid-19 previously. But with the cloud of uncertainty hanging over economic conditions, the downside risks for growth could account for some sell-the-news on expectations that lending momentum could be nearing its peak, as businesses continue to cut back on investment spending while the sustainability of consumer spending from reopening remains a question.

Net fee income declined for the second consecutive quarter year-on-year

Amid the downbeat risk sentiments during the first half of the year, the weakness in wealth management income on lower sales of investment products has shown up in UOB’s results. Net fee income was 2.4% lower YoY, marking its second quarter of decline.

Resilience in record credit card and loan-related fees have provided some cushion for the weakness, suggesting that pent-up consumer demand and accumulated savings remains intact to drive spending in the near term as reopening takes place. The question will continue to revolve around whether the outlook for consumer spending can sustain if elevated pricing pressures remain persistent. The latest Singapore’s inflation rate in June continues to reveal an upside risk, with headline inflation pulling ahead of expectations with a 6.7% YoY increase compared to 6.2% consensus.

Fund flow data last week showing no signs of prominent institutional net inflows yet

The SGX weekly fund flow data revealed an ongoing distribution in the financial sector since the start of the year, as institutional investors pare down on their holdings to position for a global tightening in monetary policies by central banks. The latest net institutional positioning for financials is currently at its lowest level since February last year and while the extent of overall net outflows seems to have eased in recent weeks, institutional investors remain cautious in taking on additional risks with no prominent amount of net inflows being presented yet.

Dividend yield for banks to be maintained at 4-4.5% range

UOB has maintained its semi-annual dividend of 60 cents per share, translating to a dividend yield of 4.3% at current price. This is in line with DBS and OCBC as well, with dividend yield for all three local banks to deliver between 4 to 4.5%. While no further increase in dividends could be expected amid the challenging economic conditions ahead, the three banks seem well-positioned to weather the downturn with a healthy build-up of loan loss provisions and healthy Common Equity Tier 1 (CET1) ratio (UOB at 13.1% in Q2).

With the share price movement for UOB after its earnings release today, it may seem that market participants are looking beyond the current earnings and are focusing on signs of moderation as well. Strength in NIM reversion has largely came in line with market expectations, with the no-surprise leading to sell-the-news sentiments to coming into play. On the four-hour chart, technicals are reverting to more neutral conditions from previous overbought levels. A previous break of a descending channel pattern could leave its upper trendline on watch as potential. This could leave the S$26.85 level in focus next.