Slowing more Asset quality benign. NEUTRAL, this is the short view of the sector by Maybank IB as the investment bank looks into the banking space in Singapore.
UOB is set to report 3Q23 on 26 Oct, DBS 06 Nov and OCBC 10 Nov. The house expects slowing NII. NIMs should be supportive but could be partly offset by weak loans. Fees are unlikely to provide much growth with wealth management still in the doldrums. While asset quality should remain benign, Maybank says it expects increasingly cautious guidance and a potential uptick in cautionary provisions. On the other hand, dividend guidance is likely to keep to an optimistic tone, especially with further capital releases with BASEL IV in 2024E. UOB could marginally surprise on the upside from stronger ASEAN consumer growth, but need to watch FX translation.
Flattish NIMs, weak loans. NoII recovery tepid
Sector NII in 2Q23 expanded +2.7%, partly from supportive NIMs (DBS +4bps QoQ, UOB/OCBC flattish). The Fed rate hike in July could add to asset yields. Concurrently, we saw rational deposit competition in 2Q23, with stable CASA ratios. With the sector flush with liquidity (loan-deposit ratio ~81%), we expect similar trends to persist in 3Q23. Hence, NIMs should
remain at current levels. On the other hand, loans fell -1% YoY in 2Q23.
Weak demand for trade-related debt was a key driver. Continued weakness in China, plus accessibility of cheaper domestic funding (2.65% China MLF rate vs. 3.71% 6-mth SORA), could likely drive further contraction in volumes. The house expects to see further downgrades to Management guidance for 2H23. Significant market volatility should have been supportive for
customer hedging flows in trading income. However, own-book investment gains may have seen a deceleration given a yield curve that shifted higher and inverted steeper. Separately, despite reasonable new money inflows in 2Q23, wealth management fees showed little signs of recovery given cautious client sentiment and high rates keeping funds locked up in
deposits. These trends are likely to persist in 3Q23, increasing downside risks to fee income.
NPLs under-control, but rising caution
NPL ratios were flat QoQ and new NPL formation was benign in 2Q23. Maybank thinks the current interest rates seem to be high enough to filter out marginal customers, while not high enough to cause undue stress to a majority of customers, which are skewed towards large corporates and SMEs. In this context, the house expects asset quality to remain supported in 3Q23. However, additional cautionary provisions from slower macro growth cannot be discounted. Similarly, we expect a more cautious tone from Management on asset quality and provisioning. While no dividend surprises are expected, continued guidance for higher potential payouts are likely given upgrades to CET1 following BASEL IV implementation next year.
Overall, Maybank thinks UOB has the highest potential to surprise on the upside from stronger ASEAN contribution and upside from Citi integration, although FX translation risks from higher SGD need to be considered
