● Singapore banks report 3Q15 results around end-October— OCBC (28-Oct), UOB (30-Oct) and DBS (2-Nov). Overall, we expect 3Q15 to be a weak quarter with profits declining 10% QoQ / 7% YoY mainly driven by weaker non-interest income. UOB likely to deliver better sequential earnings growth.
● Earnings drivers: (1) Loan growth (<1% QoQ) – weak volume growth likely to be cushioned by a weak SGD, (2) NIMs (flat) – any residual benefits from higher SIBOR offset by drag from ASEAN/China NIMs, (3) Non-II weak across the board and (4) Credit costs likely to remain flat despite some NPL increase.
● We expect the 3Q15 result in itself to be a non-event, with the focus more on increasing asset quality concerns around Commodities, China, ASEAN and Singapore property-related exposures. More granular disclosure from banks would help.
● DBS is our top pick in the sector from a 12-month view—least exposed to ASEAN risks, least affected by funding competition in Singapore and is the most leveraged to rising short-term rates.
3Q15: QoQ weakness likely to be driven by non-II, with DBS and OCBC more at risk
QoQ weakness in bottom line is likely to be driven by non-interest income as difficult market conditions in 3Q are likely to be a drag. We do not expect credit costs to increase meaningfully in 3Q.
Loan growth: Weak SGD the only saving grace
Loan growth in volume terms is likely to be very weak, but growth in SGD terms could be better due to SGDUSD depreciation. UOB/OCBC could see better volume growth, but could lose out on weaker ASEAN currencies.
NIMs: Likely flat in 3Q, before picking up again in 4Q Most of the increase in SIBOR during 3Q has been backended, boosting NIMs only in 4Q. Weaker ASEAN and Greater China NIMs are likely to be a drag, with overall Group NIMs at best flat.
Banks need to address asset quality concerns
While a weaker top line growth in 3Q would be within expectations, investors are likely to focus more on asset quality related disclosure for banks. We do not expect any meaningful change in the asset quality situation (or credit costs) during the quarter. Four key areas of investor concern—Commodities, China, ASEAN and Singapore property.
DBS: Investors looking for more granular disclosure on their commodities-related exposure.
UOB/OCBC: Investor concerns about their ASEAN exposure are likely to linger, until confidence on overall macro conditions improves.
Credit costs: We do not expect a big change QoQ
With no loan growth and NPLs likely to inch up again in 3Q, banks are likely to shift towards a higher level of SP in the mix, rather than increase overall credit costs.
Cost control difficult in a weakening top line growth
Banks might find it increasingly difficult to keep cost-income ratios under control in a weakening top line growth environment. (Read Report)
Source : Credit Suisse Asia Pacific Equity Research