Singapore bank forecast: When will OCBC, DBS and UOB recover?

• OCBC's earnings to 'lose steam' as interest margin drops to 2008 levels
• DBS Group could recover in 2021 on 'frontloading of provisions'
• UOB's profit for next two years to fall on higher credit costs

Singapore’s three main banks – Oversea-Chinese Banking Corp (OCBC), DBS Group Holdings and United Overseas Bank (UOB) posted largely underwhelming Q2 results weeks ago.

Considering this, how do analysts and brokers see earnings and stock performing the rest of this financial year?

OCBC’s earnings to ‘lose steam’ as interest margin drops to 2008 levels

Earnings of OCBC ‘may lose some steam this year, led by narrower interest margin, higher credit cost and weak loan growth due to the impact of the coronavirus’, wrote Bloomberg Intelligence senior analyst Diksha Gera.

OCBC’s net interest margin (NIM) for the rest of 2020 is expected to remain close to the money lender’s guidance of about 1.5%, which would put it below 2019’s 1.77%.

This would also bring the bank’s NIM to its lowest level since the 2008 global financial crisis, even lower than Q2 2020’s 1.6%.

‘Its wealth management business may support profit, though quarterly contributions could remain volatile,’ Gera further noted, adding that asset-quality risks may persist alongside higher credit cost of around 25 basis points from 2019.

Meanwhile, it should also be noted that OCBC – along with DBS Group – have a larger exposure to Greater China, which credit analysts Rena Kwok and Sheena Gupta stated could ‘spur OCBC’s recovery’ in the second half of 2020 should China rebound economically.

In terms of share price outlook, the OCBC stock currently has an average 12-month price target of S$9.87 from 21 analysts polled by Bloomberg. This represents an upside of 11.8% from the last traded price of S$8.83 as at the close of Thursday 20 August 2020.

Additionally, 10 brokers rated the stock a ‘buy’, eight called it a ‘hold’, and three recommended for it to be sold.

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DBS Group positioned for a possible recovery in 2021

DBS Group's high loan loss provisions in Q1 2020 resulted in a 29% drop in net profit that quarter, which Gera believes may also dent full-year profit.

However, she believes this ‘frontloading of provisions’ could position the bank for a recovery in 2021.

‘The bank may set aside 80-130 basis points of provisions in 2020 and next year, as it addresses potential losses from stressed accounts impacted by the pandemic,’ she wrote on 11 August 2020.

A cause for cheer comes from the fact that lending is likely to remain resilient in 2020 as corporate borrowers draw down on credit lines.

Net interest margin may also taper this year by about 30 basis points to 1.6%, led by lower rates and excess liquidity.

On the plus side, she noted that lending is likely to remain resilient in 2020 as corporate borrowers draw down on credit lines, while a strong treasury business may buoy non-interest income. Fee income could also improve on the back of an easing of lockdown since June.

In terms of share price outlook, the DBS stock currently has an average 12-month price target of S$22.96 from 20 analysts polled by Bloomberg. This represents an upside of 10.6% from the last traded price of S$20.76 as at the close of Thursday 20 August 2020.

Additionally, 12 brokers rated the stock a ‘buy’ while eight called it a ‘hold’.

UOB’s 2020-2021 profit could fall on higher credit costs

UOB's profit for FY2020 and FY2021 may fall as revenue gains taper while credit costs tick higher, according to Gera.

Lending, after 2019's 3% expansion, could continue to underwhelm with sub-5% growth this year.

Net interest margin, she added, may also drop to a record low in 2020, following a decline to 1.48% in the second quarter, as interest rates stay low and with the Fed unlikely to hike anytime soon.

‘Credit costs could remain elevated at about 60 basis points for 2020 and 2021 as the bank raises general provisions ahead of a likely nonperforming-loan increase once debt moratoriums are lifted,’ Gera stated.

With Southeast Asia accounting for 83.5% of the bank’s 2019 revenue (including Singapore), Gera noted that the bank’s returns may be more dependent than peers on an economic recovery across the region.

In terms of share price outlook, the UOB stock currently has an average 12-month target of S$21.93 from 20 analysts polled by Bloomberg.

Additionally, 10 brokers have given the UOB stock a 'hold' rating, eight a 'buy' rating and just two called it a 'sell'.

How to trade Singapore banks with IG

Are you feeling bullish or bearish on OCBC, DBS Group or UOB stocks? Either way you can buy (long) or sell (short) the asset using derivatives like CFDs offered on IG's industry-leading trading platform in a few easy steps:

1. Create a live or demo IG Trading Account, or log in to your existing account
2. Enter <Oversea-Chinese Banking Corp Ltd>, <DBS Group Holdings Ltd> or <United Overseas Bank Ltd> in the search bar and select the instrument
3. Choose your position size
4. Click on ‘buy’ or ‘sell’ in the deal ticket
5. Confirm the trade