Singapore banks in a sweet spot?
Their net interest margins are improving and earnings are expected to rise even more, says DBS.
Singapore banks are also positioned well to endure vulnerabilities stemming from the renewed EU turmoil.
Here's more from DBS:
Ex-trading income, P&L items were largely in line. Generally, 1Q12 underlying results were largely within expectations excluding the huge surprises in trading and investment related income. We think the quantum of trading gains may not be repeated in subsequent quarters but nevertheless will remain a wildcard for earnings surprises. NIM improved and loan growth moderated while provisions remained low. OCBC’s underlying trends lagged peers in terms of NIM and loan growth. Stripping off trading income and insurance profits, OCBC’s pre-provision profits were better than UOB’s/ Provisions were lower as expected while NPL ratios were flat but OCBC’s saw a slight uptick.
Earnings raised; turning more positive. We keep our stance that the credit cycle will remain healthy and provisions to stay low. Post 1Q12 results, we have raised our FY12-14F earnings by 1-4%, mainly from NIM and to a lesser extent non-interest income, and remain ahead of consensus. Street estimates were revised up post results. Our NIM revisions suggest that it has bottomed. We expect NIM to be stable going forward compared to a 3bps decline previously. Banks believe that NIM could further surprise if corporate loan spreads can be raised. This will pose further upside risk to our forecasts. We project 10% earnings growth for 2012 (from 7% previously) premised on flat NIM and provisions, 12% loan growth, 43% cost-to-income ratio with non-interest income growing at 6%.
While all looks rosy for now, we caution on possible volatility as downside risks in the global environment have once again re-emerged and could reverse positive sentiment. In that scenario, we strongly advocate accumulating Singapore banks as they are safe bets given robust asset quality and are strongly capitalized even with Basel III adoption. Overall drivers are very much Asian-centric with minimal European exposure. Continued strain in the EU could provide business opportunities as we have observed in the past year.