Seeing the headline, “Singapore bank DBS’ Q3 profit beats view, sees steady earnings next year“, might no longer elicit surprise. Once more, our local banks has surpassed expectations, delivering stellar results in the third quarter of 2023.
For those who have read our previous analyses on the banks’ quarterly updates, you’ll recall discussions about concerns like interest margin peaking and a reduction in loan growth, factors deemed less favourable for banks. Now, faced with this headline once again, introspection is warranted.
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Were initial assessments off the mark? Was any critical detail overlooked?
Let’s delve into the numbers to unravel any intricacies and gain a deeper understanding of our local bank’s Q3 performance.
DBS vs OCBC vs UOB: Who Performed Best in 3Q23?
As usual, let us start with the headline metrics, with green indicating the best performer and red the worst:
| DBS | OCBC | UOB | |
| Revenue Growth (YoY) | 16% | 13% | 9% |
| Net Profit Growth (YoY) | 18% | 21% | 5% |
| Dividend Yield | 5.43% | 6.17% | 5.84% |
| Net Interest Margin | 2.19% | 2.27% | 2.09% |
| NIM Growth | 3 bp | 1 bp | -3 bp |
| Non Performing Loans | 1.2% | 1.0% | 1.6% |
| Capital Adequacy Ratio | 14.1% | 14.8% | 13.0% |
| Return on Equity | 18.6% | 14% | 13.9% |
| Price to Book | 1.45 | 1.09 | 1.13 |
| Price to Book Median (5 years) | 1.33 | 1.04 | 1.12 |
As observed, akin to previous quarters, all three local banks have delivered commendable performance in Q3 2023 revenue compared to the same period last year, driven by an increase in net interest margin and a surge in loans being refinanced at elevated interest rates.
Same old story, I know.
However, what sets this quarter apart is the stark contrast in year-on-year growth when compared to just one quarter ago.
In 2Q23, DBS, OCBC, and UOB boasted year-on-year revenue growth rates of 35%, 30%, and 31%, respectively. Fast forward to the current quarter, and these figures have witnessed a drastic reduction, standing at 16%, 13%, and 9%, respectively—a more than half cut in growth rates.
A quarter-on-quarter analysis reveals a continuation of this slowdown, with a potential shift toward declining growth for the banks.
In the previous quarter, all banks managed marginal revenue growth ranging between 1% and 3%. Contrastingly, in the current quarter, DBS is the sole standout with a 3% revenue increase, while UOB and OCBC face stagnant or negative growth at 0% and -1%, respectively.
The trend extends to the bottom line, with DBS and UOB experiencing a 2% decline in net profit. The exception lies with OCBC, boasting a commendable 6% growth in net profit.
Note that a significant portion of OCBC’s net profit growth stems from a decline in total allowances, causing an inflation in its net profit figures.
This prompts the same critical question we tried to answer last quarter: Can these major Singapore banks sustain their revenue growth in the quarters to come?
Singapore Banks Net Interest Margin: A Current Assessment
As it stands, prevailing market conditions indicate that interest rates have reached their peak, with little likelihood of further Federal Reserve rate hikes. Local banks concur with this assessment, a sentiment that doesn’t bode well for net interest margin, expected to remain stagnant or even decline.
This development raises concerns for revenue growth, as the robust financial results of local banks in recent quarters have hinged significantly on elevated net interest margins. A decline in this metric foreshadows lower net interest income, subsequently impacting overall revenue.
The tables below serve as visual representations, capturing the evolving trend across all three banks. Observing the various figures below, you would see net interest margin growth is either plateauing or showing signs of discernible decline.
Interestingly, DBS has recently adjusted their presentation strategy, opting for a more concise 3-quarter projection instead of the previous 6. Hmm????
Anyways, in the interest of offering a more insightful perspective on Net Interest Margin trends, I will leave the 2nd Quarter slide below.
Nevertheless, credit is rightfully due where deserved.
Notably, OCBC has managed to defy its prevailing trend of declining net interest margins, albeit with a marginal 1 basis point increase.
Interplay of Net Interest Margin and Loan Dynamics
The net interest margin (NIM) is undoubtedly a crucial factor in understanding net interest income, but it’s only one piece of the puzzle. The volume of loans plays an equally significant role, and as the CEO of DBS has pointed out, strategic adjustments can counterbalance the challenges posed by decreasing NIM. Piyush Gupta remains optimistic, suggesting that the model run by his team indicates a potential pickup in loan growth, mitigating the impact on net interest income despite marginal NIM declines.
In the current environment, marked by elevated interest rates, the actualization of this outlook remains uncertain. Businesses are exercising caution in borrowing funds, contributing to a scenario where loan growth has either plateaued or experienced a decline.
Notably, OCBC stands out with a slight increase in its loan book, but both DBS (excluding the recently added Citi Taiwan) and UOB have witnessed a decrease in their loan portfolios.
Considering the collective impact of stagnant NIM and declining loan growth, it appears that achieving record growth for banks in the near future could be an uphill task.
Looking ahead, the prospect of a sudden drop in net interest income seems unlikely, given the expectation of sustained high-interest rates until the end of the year. The potential for the Federal Reserve to initiate rate cuts from 1Q 2024 onwards adds an element of uncertainty.
However, there are factors that could continue supporting the earnings of banks.
3 Factors That Could Support Singapore Bank Earnings
Firstly, the boost from customers seeking to refinance mortgages and loans, especially those tied to lower interest rates, could provide some support. DBS, in particular, has indicated that around one-fifth of its commercial portfolio is yet to undergo repricing.
Secondly, the ample liquidity in customer deposits positions banks to pass on lowered rates to depositors without compromising net interest margins (NIM).
Lastly, a potential scenario where loan growth increases in the future as interest rates continue to drop remains plausible.
Nonetheless, it’s crucial to acknowledge that while stable income may persist for a few more quarters, the likelihood of witnessing the same remarkable growth in net interest income as seen in the past is rather improbable.
A Closer Look at Non-Interest Income Trends
Moving beyond interest income, banks generate revenue through various channels such as wealth management, cards, investment banking, and transaction services, collectively falling under the umbrella of non-interest income.
In this realm, mirroring the previous quarter, we observe a lack of significant year-on-year growth across all three banks. The growth rates exhibited by each bank are either average or, in some cases, experiencing a decline in non-interest income.
This trend strongly suggests that the anticipated deceleration in interest rate income cannot be adequately compensated for by fee-based income.
Should You Buy Singapore Banks Now?
In conclusion, the current landscape reflects a deceleration in the growth of local banks’ revenue and profit. While we anticipate that revenue and profit may not experience a drastic drop in the foreseeable future, the signs of a slowdown in growth are becoming evident. Consequently, if you’re considering banks for short-term investments, the current scenario may not present an optimal opportunity.
However, individual investment decisions should be guided by your unique investment goals. The recent uptick in dividend announcements adds an enticing dimension, especially for dividend investors seeking reliable income streams. For those capable of adopting a buy-and-hold strategy for the long term, despite potential fluctuations in share prices, these banks may still be attractive options, offering substantial yields ranging from 5 to 6%.
For those interested in a deeper exploration, OCBC stands out as an intriguing prospect. Its recent performance surpasses that of its peers, coupled with its status as the most cost-effective option in terms of valuation. This combination of factors positions OCBC as a noteworthy consideration for those navigating the evolving landscape of banking investments.
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