Singapore Banks - DBS Research 2022-10-21: Are Stellar Net-Interest-Margins (NIM) Priced In?

Singapore Banks - Are Stellar Nims Priced In?

  • Net-interest-margin (NIMs) are main driver for Singapore banks' 3Q22 earnings. DBS/OCBC/UOB saw NIM expansion of 12bps/16bps/9bps q-o-q during 2Q22, respectively. During 2Q22 results, Singapore banks have guided positively for FY22F NIMs.
    • DBS guided for NIM to hit 2% during 2H22 while
    • UOB guided for > 20bps expansion over the next two quarters combined.
  • Recall that 25bps/50bps hikes in March/May 2022 have already culminated in a 12/16/9bps q-o-q improvement across DBS/OCBC/UOB, respectively, and DBS’s exit NIM for July 2022 already exceeded 1.8%. Given the 75bps Fed hike each in June, July, and September 2022, respectively, we believe 3Q22 NIMs are likely to surprise on the upside as asset yields continue to reprice, strongly driving 3Q22 earnings, with average 3MSIBOR and 3M SORA OIS having seen 125bps and 146bps increases q-o-q, respectively.
  • We estimate 3Q22’s NIMs improvement q-o-q will land in the range of ~20- 30bps and this is likely to be a record quarterly improvement for the banks.

Cost of deposits set to rise with CASA expected to decline, though effect of higher loan yields still dominates.

  • During 3Q22, Singapore banks have raised interest rates on their flagship salary-related accounts. For customers who fulfill requirements for various bonus interest categories (excluding investments), Singapore banks are offering up to an 87bps higher effective interest rate on various quantum of savings.
  • On the fixed deposit front, it has also been largely competitive, with increases of 30-80bps across the highest fixed deposit offerings from Singapore banks across July to September 2022.
  • As at 2Q22, DBS/OCBC/UOB saw slight declines in CASA ratios to 72%/61%/55%, respectively, and we expect the trend to continue, as customers continue to put monies towards higher yielding instruments such as fixed deposits and Singapore Savings Bonds, amidst others. We believe the effect of higher loan yields will continue to dominate the higher cost of deposits, translating to strong NIMs for 3Q22.

Singapore banks continue to be beneficiaries of rate hikes; higher NIM momentum on the back of rate hikes.

  • Banks’ management have previously guided for positive net interest income contributions on the back of higher interest rates.
    • DBS management has guided for S$1.8-2bn of net interest income sensitivity for every 100bps increase in US$ rates.
    • OCBC management guided for S$670m incremental net interest income, or 18bps increase in NIM, for every 100bps increase in rates.
    • UOB management guided for S$600-800m net interest income impact, or 12-16bps increase in NIM, for every 100bps increase in rates.
  • Sensitivity analysis: Singapore banks will see a ~3-8bps increase in NIM for every 25bps increase in rates, resulting in a 3%-6% earnings uplift.

Cautious loan growth to stay.

  • During 2Q22, DBS/OCBC/UOB saw loan growth of 2%/1%/1% q-o-q, respectively, as loan growth momentum takes a breather.
  • Amidst the more uncertain macroeconomic environment as well as higher interest rates, we will continue to be cautious about loan growth in the upcoming quarters, with FY22F loan growth likely to come in at a rate of mid-single digits across the banks.

Non-interest income mixed as market sentiment weighs on.

  • As market sentiment continues to be weak, we expect wealth management fees to continue to be soft during 3Q22, while card fees continue to be strong due to the reopening of borders and resumption of activities.
  • Customer flow for trading is expected to be strong in 3Q22 on the back of healthy customer levels and higher hedging activities in the rising rate environment. We expect non-interest income to be largely flattish q-o-q.

Asset quality a key concern for investors; Singapore banks have buffers in place since COVID-19 pandemic.

  • We continue to find comfort that Singapore banks have emerged from the COVID-19 pandemic with good buffers for credit costs in place, where DBS/OCBC/UOB made huge provisions ($3.1/S$2.0/S$1.6bn of provisions, representing 70/67/57bps credit costs), largely in anticipation of a deteriorating credit environment that did not materialise. As a result, Singapore banks now have a high provision coverage of 91%-113%.
  • We believe that asset quality of the overall portfolio is still benign. While pockets of NPLs may emerge every now and then, these are likely standalone cases and not reflective of any broader systemic risk at the moment. However, we should continue to keep watch on any impact from higher inflation on the broader economies.

Singapore banks’ credit costs should normalise, as 1H22 credit costs are low; UOB should reverse Shimao provisions.

  • We expect credit costs to continue to normalise as banks make more general provisions in a more uncertain macroeconomic environment, with the banks’ managements guiding as such:
    • DBS is guiding for 10-11bps FY22F credit costs;
    • OCBC is guiding for FY22F credit costs of 20-25bps, implying a 2H22F credit costs of ~30bps; and
    • UOB increased its credit costs guidance from 20-25bps to 25bps for FY22F during 2Q22.
  • We believe that while the banks should see higher provisions q-o-q in 3Q22 with the exception of UOB, actual provisions for FY22F should come in lower than the guidance. We believe UOB is likely to reverse the Shimao provisions taken in 2Q22 due to a settlement with the borrower.

Remain positive on Singapore banks and look forward to higher dividends; maintain BUY on UOB and OCBC.

Above is the excerpt from report by DBS Group Research.
Clients of DBS may access the full report in PDF @

Rui Wen LIM DBS Group Research | 2022-10-20
SGX Stock Analyst Report NOT RATED MAINTAIN NOT RATED 99998.000 SAME 99998.000

Read also DBS Research's most recent report:
2022-10-28 UOB - A Stellar NIM Showing, 3Q22 Results Strongly Ahead Of Consensus

Target prices by 3 other brokers at UOB Target Prices.
Listing of broker reports at UOB Analyst Report.

Relevant links:
UOB Share Price History,
UOB Announcements,
UOB Dividends & Corp Actions,
UOB News Articles


SGX Stock / REIT Search


Trust Bank Referral Code