Is DBS still a better buy than UOB and OCBC after the third quarter results?

What happened?

The trio of local banks reported another set of strong results in the third quarter. 

In fact, DBS reported a record net profit in the third quarter, with its profit rising by 16% compared to the previous year. 

This continues a trend we have seen in recent quarters, where DBS also reported a record net profit in the second quarter.  

Despite the good earnings performance, DBS’ share price has fallen by about 6% year-to-date as of 24 November, underperforming the Straits Times Index. 

Since CEO Piyush Gupta’s share sale earlier in August, DBS share price has fallen by about 7%.

DBS, UOB and OCBC also did not make it to our list of of Singapore blue chip stocks that paid consistent dividend yields.

Amongst the local banks, OCBC’s share price has performed the best year-to-date with a gain of 3.5% as of 24 November.

UOB has performed the worst amongst the Singapore banks with a share price decline of 11% year-to-date as of 24 November. 

UOB’s share price hit a 52-week low of S$26.82 earlier this month after the company reported its third quarter earnings. 

Let us dive deeper into the recent results of the Singapore banks to find out what is driving the divergence in the share price of DBS, UOB and OCBC.

What you need to know about DBS, UOB and OCBC third quarter results

Positives from Singapore banks third quarter results

• Strong fee income growth driven by credit cards and wealth management
• Asset quality remained healthy 

Negatives from Singapore banks third quarter results

• Net interest margins (NIM) appear to have peaked. The banks guided for flat or lower NIM in the fourth quarter of 2023 and 2024. 
• Loans growth was lacklustre. All three banks lowered their guidance to low single-digit growth in 2023.
• UOB expects to incur further integration costs of S$170-200m in 2024 for Citi acquisitions.

Positives from DBS, UOB and OCBC third quarter results

#1 - Fee income growth anchored by wealth management

All three banks reported improvements in fee income. 

DBS’ fee income rose 2% in the third quarter compared to the previous quarter. This was driven by stronger fees for wealth management and credit cards.

UOB’s fee income improved 13% in the third quarter compared to the previous quarter, driven by loan related fees and credit card fees. Wealth management fees were also higher in the third quarter.. 

OCBC posted higher fee income that was 7% higher compared to the previous quarter., led by wealth management. 

#2 – Asset quality remained healthy

The asset quality of DBS, UOB and OCBC remains healthy, even as all three banks provided higher specific allowance on loans in 3Q23 with the higher rate environment. 

DBS’ non-performing loan (NPL) ratio increased slightly to 1.2% in the third quarter from 1.1% in the second quarter, due to new non-performing assets with the inclusion of Citi Taiwan. 

DBS’ higher specific provision in the third quarter was due toallowances taken for exposures linked to the recent money laundering case in Singapore. 

UOB’s NPL was maintained at 1.6%, unchanged from the previous quarter.

OCBC’s NPL improved slightly to 1.0% in the third quarter from 1.1% in the second quarter, as it recovered a non-performing loan extended to a PRC real estate corporate. However, it was also hit with an NPL in the construction sector in Asean.

Negatives from DBS, UOB and OCBC third quarter results

#1 - Net interest margin appears to have peaked

DBS’ net interest margin (NIM) continued to expand in the third quarter, rising to 2.19% from 2.16% in the second quarter. 

DBS expects FY23E NIM to be around 2.16%, implying a sequential decline in the fourth quarter.

DBS also guided FY24E NIM to be “couple basis points lower compared to 2023”, on the assumption of no more Fed hikes, and Fed cuts to commence in 2H24.

UOB’s NIM declined to 2.09% in the third quarter from 2.12% in the second quarter,, due to lower margin on excess liquidity. This is the second consecutive quarter of NIM decline for UOB. 

However, UOB guided for NIM to be stable at current levels for FY24E.

To achieve this, UOB is writing longer-term loans, cutting back on lower-margined trade loans, and curbing excess liquidity to reduce funding cost. 

After dipping for 2 quarters, OCBC’s NIM expanded to 2.27% in the third quarter from 2.26% in the second quarter. 

OCBC guided a FY23E NIM at 2.25%, which will imply a potential decline in the fourth quarter. 

#2 - Loan growth remained weak

DBS’ gross loans grew 1% compared to the previous quarter due to the inclusion of Citi Taiwan, which contributed S$10bn in loans. 

Excluding Citi Taiwan, loans contracted 1% compared to the previous quarter due to higher repayments. Higher interest rates led to higher loan repayments. 

Loans were flat compared to the previous quarter  at UOB and OCBC.

All three banks guided for low single-digit percentage growth in 2023, reflecting low appetite for new loans in a higher interest rate environment.

#3 - UOB expects higher integration costs for Citi acquisition

UOB expects to incur further costs of about S$170-200m for Citi acquisition. 

So far, it had incurred S$255m in 9M23. 

Most of the additional cost will be incurred in the first half of 2024 with the acquisition of Citi Thailand expected to be completed in April 2024, and Citi Indonesia by end 2023. 

What would Beansprout do?

Looking ahead to 2024, we would be looking out for a few headwinds that may impact the profitability of Singapore banks.

These may potentially include the following:

1) Lower net interest margin as the Fed is expected to begin rate cuts from 2H24

2) Lower corporate loan demand

3) Need to set aside higher provisions if the risk of default rises

The bright spot for the banks is the increase in wealth management activities that would drive fee income.

With the dimming of prospects, we will focus on the possibility of a higher dividend payout by the Singapore banks. 

Among the local banks, DBS continued to have the highest return on equity of 18.2% in the third quarter. 

UOB’s ROE fell marginally to 13.9% in the third quarter from 14.1% in the second quarter.

OCBC’s ROE improved marginally to 14.0% in the third quarter from 13.5% in the second quarter.

Singapore banks offer an attractive dividend yield of 6.0% and above, with DBS’ dividend yield at 6.0% and OCBC’s dividend yield at 6.3%. 

Amongst the trio, the high ROE generated by DBS raises the possibility of a higher dividend payout in the fourth quarter. 

On the other hand, OCBC reiterated that dividend payout will be maintained at 50%, reducing the likelihood of an exceptional payout despite the strong ROE.

As such, we would be looking at the Singapore banks more for their attractive dividend yields rather than expectations for better earnings prospects in 2024. 

If you are looking to build your dividend income portfolio, check out our list of REITs that raised their dividends in the recent quarter.

Join the Beansprout Telegram group and Facebook group for the latest insights on Singapore stocks, REITs, bonds and ETFs. 

Related links: 

• DBS share price and analysis
• DBS dividend history
• UOB share price and analysis
• UOB dividend history
• OCBC share price and analysis
• OCBC dividend history