What's trending - Singapore banks earnings in focus

Q: The results of Singapore banks are always closely watched. What are some of the key takeaways from the results?

Rising interest rates impact. Singapore banks benefited from rising interest rates and reported an increase in net interest margin (NIM) and higher profits in 2Q22. OCBC saw the sharpest improvement in NIM with a 16 basis point (bp) improvement compared to the previous quarter, while UOB’s NIM grew the least with a 9 bp increase.

What also caught our attention was that DBS shared its NIM had already exceeded 1.80% in July, rising further from 1.58% in 2Q22, and expressed confidence that NIM could reach 2.00% between 3Q22 and 4Q22.

Asset quality in focus. Investors are expressing growing concerns about a deterioration in asset quality for Singapore banks, after UOB reported an increase in non-performing loans (NPLs) to 1.7% in 2Q22 from 1.5% in 2Q21. UOB management explained that this was due to its exposure to a Chinese property company. In total, its direct exposure to Chinese developers is estimated to be 1% of its loan book.

China companies exposure. This increase in NPLs was not seen for DBS and OCBC. In fact, OCBC’s NPLs declined to 1.3% in 2Q22. In response to concerns about exposure to slowing Chinese growth, Singapore banks shared that they predominantly service the offshore needs of Chinese companies when they expand overseas, as well as existing customers within ASEAN when they expand into China. As a result, their exposure to domestic activities of Chinese companies is limited. DBS’ NPL remained unchanged compared to the previous quarter at 1.3%.

Balance sheet and dividends. Singapore banks continue to maintain a strong balance sheet position. DBS commented that it intends to review its dividend policy at the end of this year and could potentially hike its dividend in 2023.

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