Singapore banks’ earnings Q4 2021 round-up

Overview

All three Singapore local banks have released their Q4 2021 results with overall net revenue seeing single-digit growth on a year-on-year basis. On the earnings front, UOB and DBS have outperformed expectations with a 48% and 37% increase from a year ago, respectively. OCBC, however, failed to deliver, with earnings plunging 14% year-on-year from higher loan losses provisions and operating expenses.

1. Net interest margin not reflective of higher rates yet, but lending momentum intact

The overall net interest margin thus far has failed to see any significant uptick amid the still-low interest rate environment. In the latest quarter, the three local banks’ net interest margin ranged from 1.43% to 1.56%. Largely hovering at these levels over the past quarters, it is still some distance away from the pre-Covid figures of 1.7-1.8%. Singapore’s 3-month SOR and SIBOR have also largely remained flat, with no significant pick-up yet.

Source: DBS, OCBC, UOB

That said, we are entering into an interest rate upcycle. In consideration that the Singapore rates are positively correlated with the US Fed funds rate, an impending upward revision through 2022 will drive expansion for banks’ net interest margin and aid to support its net interest income. While there are some concerns that higher rates may have an impact on overall loan demand, the strong lending momentum we have seen thus far, along with further improvement in economic conditions, may aid to limit the downside impact. For the latest Q4 2021 results, loan growth for all three banks have not shown any signs of slowing as it delivered 8-10% growth in total gross loans from the previous year.

*Total gross loans amount is in SGD millions

Source: DBS, OCBC, UOB

2. Loan loss provisions largely pared back on improving economic conditions, but OCBC stood out

With improving economic conditions, the ‘worst is over’ stance for the economy has generally led to the paring back of loan loss provisions over the past quarters although local banks are still largely taking on a prudent approach. This came after the extensive build-up in reserves for anticipation of loan losses back in 2020 and a more positive outlook ahead has generally translated to lesser build-up. Overall credit quality has also remained stable with non-performing loan ratio at the 1.3-1.6% range. As recovery continues through 2022 in Singapore and across the region, credit costs releases may be an added driver for positive earnings boost ahead.

OCBC’s latest Q4 results came as a surprise, as it delivered a significant 11% increase for its total allowances in the latest quarter, partially leading to a 9% drop in its share price over the past week. This was mainly driven by project financing delays due to supply chain disruption brought about by Covid-19, which suggests that some risks will remain, at least in the near term, although the longer-term outlook may point towards a continued recovery.

3. Fee income remains well-supported on regional recovery outlook

The net fee income has been the segment supporting the banks’ numbers, while interest income took a hit from lower net interest margins. Thus far, all three banks continue to see positive increase year-on-year, although some slowing in growth may come from higher base effect. For UOB, asset under management from high affluent customers has reached a record S$139 billion, with 57% from its overseas customers in Southeast Asia. This suggests that economic conditions in the region have thus far been resilient despite intermittent virus resurgences. In Singapore, signs of market recovery have also been prevalent with a continued rebound in card spending and wealth management activities. With Singapore’s endemic stance towards Covid-19, further recovery ahead may continue to underpin its non-interest income moving forward.

Source: DBS, OCBC, UOB

4. Singapore budget 2022 may be a mixed bag

The latest Singapore budget continues to see a push towards the green agenda, with Singapore’s aim to issue up to S$35 billion of green bonds by 2030 to fund public sector green infrastructure projects. A growing green bond market, along with further green transition among corporates, will be a longer-term tailwind for loan growth for the local banks. That said, a series of tax measures was also announced, which saw properties wealth tax in the crosshair. This came along with Singapore's recently instituted property cooling measures in December, whereby the impact may seep in towards the latter half of the year. While the overall loan growth may still deliver a net-positive, one may watch for any impact on housing loans in this aspect.

5. Institutional fund flow

Based on the SGX fund flow data, the banks have been gaining traction since the start of the year, with overall net inflows towering above the other sectors. Last week, the net inflow into the financial sector amounted to approximately S$60 million from institutional investors. That said, one may note that the slowing rate of inflow from previous weeks and the aggressive market sell-off this week, may likely lead to some distribution. Therefore, while huge institutional investors’ positioning may generally be seen as a positive, one may watch if any distribution will take place over the coming weeks.

Source: SGX

6. Dividend/Valuation

Based on recent revised dividend, the local banks have a dividend yield of around 4%, with OCBC delivering a higher yield following its recent divergence in share price. From a price-to-book valuation perspective, OCBC also seems to be the cheapest among the trio, with its valuation trading below its five-year historical mean. This is in comparison to DBS and UOB, which are trading more than one standard deviation from their five-year mean. DBS, in particular, seems to be on the pricey range, with its price-to-book back at its 2018 peak. This may draw the question on whether a re-rating may be warranted, and that growth ahead may draw high expectations in order to justify its valuation.

Source: DBS, OCBC, UOB

Source: Refinitiv, IG

Source: Refinitiv, IG

Source: Refinitiv, IG