Banks set for Q1 profit boost as corporate loans and wealth income recover

Trading and wealth management income may have rebounded between 10-36% in Q1.

Singapore banks are zooming into recovery after a weak year-end performance as a rebound in non-interest income and widening NIMs paint better prospects for the sector ahead of their Q1 results announcement.

Also read: DBS' wealth management fees to shrink 1.3% in Q4: analyst

“We estimate trading and wealth management income rebounded (broadly 10-36%) towards the levels seen in 2Q18/3Q18, in particular for DBS and OCBC which are more reliant on client activity. Better markets could also translate into mark-to-market gains of shareholder’s funds from OCBC’s insurance arm,” Andrea Choong, analyst at CIMB said in a report.

In particular, OCBC is expected to post a net profit of $1.13b in Q1 as insurance, wealth and trading income recover from the lows of Q4 2018 where earnings fell 11% to $926m. However, analysts are quick to caution that the recovery will not mimic earlier highs. “Whilst we see non-interest income recovering from the lows of 4Q18, we note that 1Q18’s record high wealth management income that was supported by strong buoyant market sentiment may not be repeated,” Rui Wen Lim, analyst at DBS said in a research note.

With a subsequent repricing exercise in March and April of mortgage board rates, which were raised by 10-50bp in December 2018 to January 2019, the banks’ net interest margins (NIMs) are also set for a slight 1-2bp increase in Q1. In contrast with floating-rate loans, mortgage board rates are more discretionary and typically lag the movement of interbank rates.

Also read: Singapore bank NIMs to widen to 1.98% in 2020

“We understand that almost all of the banks’ mortgage portfolios pegged to board rates would successfully be repriced come 2Q19. The NIM increase stemming from these actions should be spread over 1H19, with a heavier bias towards 2Q19,” said Choong.

Banks can also expect to receive a boost to their weak loan figures as M&A buzz fuels the expansion of corporate loans by up to mid-single digit in FY19 to offset tepid consumer finance growth, which has been bearing the brunt of property cooling measures. This includes CapitaLand’s acquisition of Ascendas-SingBridge; the M1 buyout by Keppel and SPH and the mega-merger of OUE Commercial REIT and OUE Hospitality Trust.

Of its peers, Choong expects that UOB will record the strongest loan growth at 2.3% QoQ in Q1 following drawdowns from previous loan commitments which will help the bank post a net income of $1.04b. DBS loan portfolio is expected to have grown 1.3% and a net profit of $1.45b. OCBC’s loans are expected to have grown by 1.2% over the same period amidst muted mortgage demand.

“Beyond FY19F, we expect opportunities arising from Urban Redevelopment Authority’s (URA) newly announced draft master plan, as well as $9bn expansion by Singapore’s two integrated resorts in rejuvenating activities in the economy, alongside loan growth,” DBS’ Lim said, adding that the banks’ dedicated digital agendas are helping drive cost efficiencies with cost-to-income ratios set to fall between 42% to 44% by 2019.