Singapore Banks - DBS Research 2022-12-01: Sustaining Deliveries

• We believe there is further NIM and earnings upside from rising rates through early 2023, as rising asset yields are likely to outpace the rising cost of funds and expect NIMs to peak in 1H23F.
• Broadly, we expect a sequential improvement in non-interest income going into FY23F, from a low base in FY22F, which saw a drag from the decline in fee income due to weak wealth management fees amidst volatile markets.

Strong provision buffers in place; normalised credit costs expected.

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• We expect credit costs to continue to normalise going into FY23F as regional economies prepare for a year of slower growth.

Singapore banks emerged strongest in the region from the pandemic; higher dividends on the cards.

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• We expect further upside in dividends for Singapore banks, as they continue to operate well above their comfortable operating capital levels, while we do not expect any material acquisitions on the cards post Citibank’s Asia franchise sale.
• Amongst the banks, DBS and OCBC have the highest CET1 ratios of 13.8% and 14.4%, respectively.
• OCBC has increased its dividend payout ratio from 47% in FY19 (FY20 saw the MAS dividend restrictions come into play) to 49% in FY21, with capacity to pay out further. Assuming a comfortable CET1 operating range of 13.5%, OCBC is estimated to have at least S$2.1bn in excess capital, which translates to ~S$0.48 per share.
• We believe continued earnings performance and a good dividend yield of ~5%, with potential for higher dividends, will continue to support valuations in FY23F, as we expect a sector earnings growth of ~10%.
• We maintain BUY on UOB (SGX:U11) and OCBC (SGX:O39) with target prices of S$34.20 and S$15.00 respectively.

Key risks: Rising cost of deposits a critical factor to watch alongside Fed signals.

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Rui Wen LIM DBS Group Research | https://www.dbs.com/insightsdirect/ 2022-12-01 SGinvestors.io

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