Banks

Banks: Poorer 3Q15 earnings but long term positive on interest rate cycle
While Daiwa expects weaker loan growth and deterioration in asset quality, it nonetheless maintains its positive outlook on the three local banks.

A breakdown of the broker’s forecasts are as follows:
1) Net Interest Margin (NIM) - DBS (+5bps q/q to 1.8%); OCBC (+8bps to 1.75%); UOB (+1bps to 1.78%)
The elevated levels of the SIBOR and SOR in 3Q15 could potentially lift NIMs during the quarter. SIBOR ended 3Q15 32bps higher at 1.14% while SOR gained 46bps to 1.24%.

2) Non-Performing Loans (NPL) - DBS (+4bps to 0.92%); OCBC (+5bps to 0.74%); UOB (+2bps to 1.26%)
One of the key overhangs on local banks is the possible increase in NPLs due to depressed commodity prices as well as poor economic conditions in ASEAN and China. The broker however highlights that up till 2H15, NPL ratios had been near record lows and while NPLs could rise, the severity of which would be highly uncertain.

Even though it sees a slight gain in overall NPLs, the house is factoring in a greater increase in credit costs with a 20bps and 21bps jump in DBS’s and OCBC’s credit cost while a UOB could see an 11bps decline in credit costs.

3) Loan Growth - (+1% across the board)
With loans growth is anaemic (Aug: +1.5% y/y, +0.5% m/m) in Singapore, the local banks are expected to miss their loan guidance of mid-to high single-digit underlying loan growth.

4) Net Trading Income
The broker expects DBS and UOB to see a 19% slump in net trading income in view of the steep correction in global equity markets during the quarter.

Overall, local banks are expected to suffer a crimp in net earnings with the exception of UOB, which is expected to see bottom line grow 27% to $963m on stronger sequential growth in its non-interest income segment.

DBS’s net profit is forecast to ease 10% to $1b after factoring a $277m provisioning charge, while OCBC will be the worst performer with earnings slumping 27% to $770m on a 52% slide in contributions from Great Eastern.

Despite this, the house remains positive on the banking sector owing to its long term bullish view of global interest rates that would underpin NIM growth. It prefers DBS (Buy; TP: $18) over OCBC (Buy; TP: $9.47), and UOB (Outperform; TP: $20.40).

OCBC will kick off earnings reporting on 28 Oct with UOB and DBS reporting on 30 Oct and 2 Nov respectively.