Singapore banks Q2 2023 earnings – Mounting hopes for a recovery ahead

Singapore banks Q2 2023 earnings – Mounting hopes for a recovery ahead

The three local banks are set to report their Q2 2023 earnings over coming weeks. Year-to-date performance has seen OCBC (+4.2%) leading the pack, while DBS (-3.5%) and UOB (-6.8%) have both dipped into negative territory. This leaves OCBC as the only local bank to outperform the broader Straits Times Index (STI), with the index eking out a 0.8% gain year-to-date.

Overall, the average year-to-date performance of our three local banks (-2.0%) has lagged behind the FTSE Asian banks ex-Japan index of -0.6%, but outperform the US KBW Bank Index which is still down 13.4% year-to-date.

Net interest income heading to a peak, loan growth and fee income on watch to sustain growth momentum

Singapore is an ‘interest-rate taker’ and with broad expectations pricing for an impending end to the US Fed’s hiking cycle, the upside for the Singapore Overnight Rate Average (SORA) and other benchmark rates used by banks for pricing loans have also seen some stalling lately. That has a direct impact on the banks’ net interest margins (NIMs), with the largest tailwind from the interest rate upcycle most likely behind us. With the net interest income portion doing the heavy-lifting for banks’ earnings over the past few quarters, the banks may now have to depend more on other catalysts to sustain its growth momentum such as loan growth and fee income.

Referring to 1Q 2023’s results, DBS CEO Piyush Gupta previously guided that NIMs “have probably peaked at around these levels (2.1%)” and expects net interest income to taper off in the future, albeit at a gradual pace. Peaking interest rates were flagged in OCBC’s guidance as well. Optimism for regional economic conditions were presented in 1Q 2023, but with the economic surprise index for Asia Pacific touching to a new low since the start of the year, potentially from China’s more downbeat growth, validation for any economic resilience will be closely watched in the banks’ guidance.

Is a recovery in lending activities in sight?

Since leading activities touched its peak in August 2022, Singapore’s bank lending data has revealed a declining trend in total loans and advances, until recently. The month of May saw the first increase for loan demand in nine months, and while a single data does not form a trend, market participants will be hoping that this could mark the start of a recovery process ahead. Both businesses and consumer loans saw an uptick in loans for May, potentially reflecting the more resilient showing in global economic conditions.

Nevertheless, latest home prices data from the Urban Redevelopment Authority (URA) revealed that 2Q 2023 has marked the first quarterly decrease in prices since the 1Q 2020, as price momentum tapered across all market segments. On a quarter-on-quarter basis, prices eased by 0.4% in 2Q 2023, down from the 3.3% gain in 1Q 2023. This could reflect some impact from higher interest rates and property cooling measures thus far, which could still instil a more lukewarm outlook for consumer loans.

Improving market conditions to support recovery in wealth management fees, card spending to remain resilient

Air traffic statistics continues to point to robust travel momentum for the second quarter, with Singapore’s airport passenger movements up 98.7% from a year ago, which could continue to underpin card spending. Forward bookings data for the Asia Pacific region suggests that the momentum could last into the third quarter as well.

Further recovery in wealth management fees could play out at the upcoming result as well, given that the improving market conditions in the second quarter may provide an uplift in investors’ sentiments towards wealth management products. That said, the recovery could be a more gradual process. Previous quarter’s result still shows a single-digit contraction in the banks’ net fee income, while results from major US banks point to some lingering headwinds around investment banking activities. Nevertheless, market participants will be looking out for clues on any worst-is-over stance, largely from the management’s outlook.

SGX institutional fund flow data revealed consistent paring of exposure in financials since the start of the year

The SGX fund flow data continues to reveal consistent net institutional outflows from the financial sector over the past months, with combined S$955 million outflows in the second quarter even though outflows have eased significantly in June (-$82 million). Nevertheless, this seems to point towards an ongoing distribution process, following the sharp post-pandemic build-up in net-long positioning from October 2020 to February 2022. More traction is headed towards other value sectors in the likes of industrials and consumer cyclicals.

DBS share price: Technical analysis

A break above the Ichimoku cloud resistance on the daily chart and its 100-day moving average (MA) seem to point to a near-term upward bias, with prices having broken above its previous rectangle pattern as a reflection of buyers taking greater control. Recent consolidation over the past week puts a potential bullish flag formation in place for now as a continuation of the upward trend, with further upside potentially leaving the S$33.70 level on watch next as a key resistance to overcome. Increasing moving average convergence/divergence (MACD) and the Relative Strength Index (RSI) reclaiming its key 50 level validates the recent upward momentum.

OCBC share price: Technical analysis

Likewise, OCBC share price has managed to find support off the key S$12.00 level, moving on to overcome its Ichimoku cloud resistance (daily) and various MAs last week. A bullish MACD crossover was formed lately, with the indicator heading above the zero line as a show of positive momentum. A downward trendline resistance in place since February this year has also been overcome for now. Prices are currently retesting its June high at the S$12.64, with any successful break to a new higher high potentially leaving the S$13.10 level on watch next.

UOB share price: Technical analysis

For UOB, perhaps much still awaits for now, with several overhead resistance needed to be overcome to provide greater conviction for buyers taking control. This includes a downward trendline and the Ichimoku cloud resistance, overall leaving the S$29.14 level as a crucial level to watch. Its RSI has managed to head above the key 50 level for the first time since April 2023, with a recent break above its ranging pattern, but further confirmation may be needed with the overhead resistance in sight.