Banks see stable credit costs and resilient earnings: RHB

The sector has had a strong start to the year, outperforming ASEAN peers.

RHB maintains an Overweight rating on Singapore banks, with DBS, United Overseas Bank (UOB), and OCBC Bank (OCBC) as top picks.

In its report, RHB said the sector has had a strong start to the year, outperforming ASEAN peers as its defensive nature and attractive dividend yields continue to attract investors.

Capital return plans from the banks have further reinforced this positive outlook, with DBS standing out for its “too-good-to-ignore” FY25F dividend yield.

4Q24 results were in line with expectations, with weaker sequential earnings largely due to seasonality and an elevated non-interest income (Non-II) base from 3Q24. Whilst lower Non-II and higher expenses led to a 16% QoQ drop in profit before tax (PIOP), PATMI still grew 8% YoY, underscoring the sector’s resilience.

Loan credit costs remained stable at 23 basis points (bps), whilst net interest income (NII) ticked up 2% QoQ (+4% YoY), helped by asset growth, and in DBS' case, improved NIM from lower funding costs.

Singapore banks have retained their 2025 guidance, with DBS and UOB expecting modest loan growth, while OCBC guides for a sharper 20bps NIM squeeze, partly due to its assumption of more aggressive rate cuts by the US Federal Reserve.

All three banks unveiled capital return plans, with DBS planning to return $8b, OCBC $2.5b, and UOB $3b over the next 2-3 years via a mix of dividends and share buybacks.

Sector earnings forecasts have been revised upwards, with FY25F-26F PATMI raised by 2-3%. Whilst FY25F sector earnings are expected to stay flat, this is largely due to the impact of the global minimum tax rate, which offsets projected 2% PIOP growth and stable credit costs.

Non-II declined 23% QoQ but was up 11% YoY, reflecting seasonality but also strong underlying growth. CASA deposits continued to rise, with UOB seeing the biggest gains, whilst asset quality remained broadly stable despite a slight rise in non-performing loans (NPLs).

Loan loss coverage eased to 114% from 121% in 3Q24, but RHB notes that provisioning buffers remain strong.

DBS remains the preferred pick, with a target price of $51.20, followed by UOB at $41.60 and OCBC at $19.10.

Whilst FY25F earnings growth may be limited, RHB believes Singapore banks will continue to provide an attractive risk-reward proposition in the face of market volatility.