DBS OCBC 2Q23 Round-up - UOB Kay Hian 2023-08-07: Steep Hikes In Dividends Plus Potential For Capital Management

• Singapore banks delivered strong earnings growth in 2Q23 with sizeable NIM expansion y-o-y, enhanced cost efficiency and benign asset quality. DBS and OCBC provide 2024 dividend yields of 5.8% and 6.2% respectively.
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Singapore banks' 2Q23 earnings

• DBS (SGX:D05)’s 2Q23 results exceeded our expectations. OCBC Bank (SGX:O39) and UOB (SGX:U11) performed in line with expectations.
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• DBS outperforms in fee income generation. DBS’s fee income grew 7% y-o-y, the first y-o-y increase in six quarters, with the recovery led by wealth management (+12% y-o-y) and cards (+17% y-o-y). OCBC and UOB saw fee income languish by -10% and -8% y-o-y respectively. Their wealth management fees also declined 16% and 3% y-o-y respectively.
• Enhanced cost efficiency. Banks delivered positive JAWS with revenue growth exceeding the increase in operating expenses. DBS and OCBC have controlled the increase in operating expenses at 21% and 2% y-o-y respectively. Cost-to-income ratios (CIR) have fallen below 40% at 38.3% for DBS (exclude Citi integration costs) and 38.5% for OCBC. UOB’s operating expenses increased 30% y-o-y (excluding Citi integration costs) and its CIR is 40.9% (excluding Citi integration costs).
• Asset quality was benign. NPL balance at DBS and OCBC decreased by 3% and 2% q-o-q respectively due to benign NPL formation and continued upgrades and recoveries. DBS’s credit cost was the lowest at 7bp due to write-back in general provisions of S$42m. OCBC’s and UOB’s credit costs were higher at 31bp (sizeable general provision of S$200m) and 30bp (specific provision for a major Thailand corporate account).
• Steep increase in regular dividends. DBS increased its quarterly dividend by 33% y-o-y to 48 cents for 2Q23. We estimate DBS’s dividend payout ratio at 46.4% for 2Q23. OCBC and UOB increased their interim dividends for 1H23 by 43% and 42% y-o-y respectively to 40 cents and 85 cents, sticking to their dividend policy with payout ratio of 50%. See DBS's dividend date, OCBC's dividend date and UOB's dividend date.
• Potential capital management with implementation of Basel IV starting 1 Jan 24. Managements of DBS and OCBC have alluded to potential upcoming capital management exercises. DBS’s estimated surplus capital is S$3b or S$1.20 per share, based on operating range for CET-1 CAR of 12.5-13.5%. OCBC is comfortable with CET-1 CAR receding lower to 14.0% over the short to medium term (3-5 years). It also has sizeable surplus capital given its current CET-1 CAR at 15.4% as of Jun 23, which is the highest among peers. Conversely, UOB prefers to deploy surplus capital to grow its customer franchise instead of returning capital to shareholders through capital management.
• Record earnings deliver high ROE. DBS, OCBC and UOB reported high ROEs of 2%, 13.5% and 14.5% respectively.
• Higher interest rates for a longer timeframe. The Fed hiked fed funds rates by 25bp at the FOMC meeting on 26 Jul 23. The dot plot indicates another rate hike of 25bp to bring fed funds rates to 5.50% by end-23. Fed chairman Jerome Powell said he does not anticipate core inflation to return to the Fed’s target of 2% until 2025, which suggests interest rates could stay higher for a longer timeframe.

Maintain OVERWEIGHT.

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UOB Kay Hian Research | UOB Kay Hian | UOB Kay Hian | https://research.uobkayhian.com/ 2023-08-07 SGinvestors.io

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