DBS topped earnings expectations earlier this week after its net interest margin rose more than forecast, but it isn’t clear if Singapore’s other two banks, OCBC and UOB, can match the performance.
It will be a hard act to follow: DBS, Southeast Asia’s largest bank, reported its second quarter net profit Monday jumped 20 percent on-year to S$1.60 billion on corporate loan growth, a higher net interest margin, record fee income and improved trading performance.
The closely watched NIM, or the difference between the interest rate banks charge to lend and their cost of funds, rose to 1.91 percent, up from 1.85 percent in the year-ago period, and beating analyst expectations for 1.89 percent or 1.90 percent. That was as loans in Singapore and Hong Kong were repriced with higher interest rates, DBS said.
The NIMs are an important driver of earnings for Singapore banks. In a mid-July note, Daiwa estimated net interest income makes up around 61 percent to 69 percent of total income for DBS, OCBC and UOB.
Both UOB and OCBC are due to report earnings Friday, before the market open.
Before the DBS earnings report, CGS-CIMB had forecast UOB would post the best on-quarter profit performance, partly on a long-awaited NIM expansion on the repricing of mortgage loan book.
In a note in mid-July, the brokerage said it expected UOB’s NIM to come in at 1.81 percent for the second quarter, up 2 basis points on-quarter.
“UOB’s NIM performance in FY18 had been lackluster, especially when compared to peers,” CGS-CIMB said, attributing the lag to the bank’s strategy of shoring up funding ahead of previous interest rate hikes. “At this stage, we believe that a nominal pause in picking up expensive
deposits could allow for some degree of NIM expansion.”
DBS research was also optimistic on UOB’s NIM outlook.
“We believe that UOB is also likely to let go of some excess funds which have been weighing on its NIM in the last few quarters, and hence is likely to reverse the trend of NIM decline,” DBS said in a July note.
OCBC research, however, pointed to comments in a UOB management meeting, where the bank said competition in Singapore’s mortgage market had spurred it to reduce pricing to keep market share. But OCBC added in the early July note that UOB may have reduced fixed deposit rates to lower funding costs.
For UOB, CGS-CIMB has forecast second-quarter net profit of S$1.05 billion, with net interest income of S$1.65 billion and non-interest income of S$746 million.
Daiwa forecast UOB’s NIM at 1.80 percent. The investment bank estimated UOB’s second quarter net profit would come in at S$1.04 billion, with net interest income of S$1.65 billion and non-interest income of S$797 million.
RHB has forecast that OCBC’s NIM widened mildly in the second quarter on the repricing of home mortgage rates, estimating a less than 4 basis point increase on-quarter from 1.76 percent in the first quarter.
CGS-CIMB forecast OCBC’s NIM to come in at 1.78 percent, up 2 basis points on-quarter.
“We believe that OCBC’s asset yields would have risen further from the mortgage repricing done over January-to-April 2019,” CGS-CIMB said. “Although we would expect OCBC to benefit from the uptrend in 1M/3M HIBOR, we understand that some of the rise in rates may not have been captured as the bank has been shifting its customers onto prime-based loans.”
DBS research was less optimistic.
“We believe that OCBC’s NIM improvement in the second quarter of 2019 is unlikely to be as strong as that in first quarter of 2019 (up 4 bps quarter-on-quarter) where the bulk of loan repricing was done,” DBS said.
For OCBC, CGS-CIMB has forecast second-quarter net profit of S$1.20 billion, with net interest income of S$1.59 billion and non-interest income of S$978 million.
Daiwa forecast NIM of 1.75 percent for OCBC in the quarter, down 1 basis point on-quarter, but up from 1.70 percent in 2018. The investment bank forecast OCBC’s net profit at S$1.18 billion, with net interest income at S$1.57 billion and non-interest income at S$1.01 billion.
To be sure, any NIM jumps in the second quarter may be one-trick ponies: The U.S. Federal Reserve cut interest rates by 25 basis points Wednesday U.S. time, with market watchers expecting at least one more cut this year.
At a post-earnings press briefing Monday, DBS CEO Piyush Gupta estimated that a 25 basis point rate cut would knock a “basis point or so” off DBS’ NIM in the third quarter. If the Fed cuts rates a second time later this year, that would likely knock another 1-2 basis points off the fourth quarter’s NIM, Gupta said.
But he noted, the SIBOR and Hibor rates the bank uses to set lending rates may offer some uncertainty as they may not fully price in, or may overprice, the U.S. interest rate changes.
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