Improving margins to support Singapore bank earnings after Q1'22 dip

Singapore's three main lenders reported an approximately 10% year-over-year decline in profits. Source: iStock

Singapore's banks are optimistic that improving margins will help their earnings rebound, after the country's three main lenders reported a nearly 10% decline in first-quarter net profit due to market volatility.

DBS Group Holdings Ltd., Oversea-Chinese Banking Corp. Ltd. and United Overseas Bank Ltd. reported improvements in their net interest margins over the previous quarter. DBS, Southeast Asia's largest bank by assets, said its NIM rose to 1.46% in the first quarter of 2022, versus 1.43% during the previous three-month period, according to an April 29 earnings report.

"We expect NIMs to see a strong rebound through the year as assets are repriced up on rising interest rates," said Thilan Wickramasinghe, head of research for Singapore and regional financials at Maybank Investment Bank. "This, coupled with rising loan growth from regional reopening, should drive positive earnings momentum."

Monetary policy tightening would allow lenders to improve their interest income as most central banks are expected to continue to hike rates, normalizing policy after unprecedented easing to help economies get through the drag from the COVID-19 pandemic. The pace of tightening is expected to accelerate as central banks shift focus toward inflation control. China is the only major global economy still looking to cut rates, while the U.S. Federal Reserve has indicated it may get more hawkish as inflationary pressures mount.

The Monetary Authority of Singapore, or MAS, set the local dollar on a steeper appreciation path in January in a rare move that took place between its regular policy reviews, citing higher inflation forecasts. The central bank announced a double tightening move on April 14, after its latest regular policy review, by further increasing the rate of appreciation of the Singapore dollar against a basket of currencies of its main trading partners and by raising the midpoint of an undisclosed band in which it allows the currency to move. The MAS uses currency rates instead of interest rates as its main monetary policy tool, as trade dwarfs the size of its local economy.

Strong momentum

Singapore's banks reported a fall in first quarter net profit due to investment losses and lower trading income amid volatile markets. A high base of comparison from the previous year also damped earnings. Still, increased lending and stable asset quality helped the banks beat analyst forecasts for first-quarter income.

DBS's net profit for the quarter ended March 31 fell 10% year-over-year to S$1.80 billion; OCBC's also declined by 10% to S$1.36 billion.

"First-quarter business momentum was strong and broad-based, and earnings were second only to the exceptional quarter a year ago," DBS CEO Piyush Gupta said in an earnings statement. NIM has recovered after falling for three years.

UOB, the smallest bank by assets among the three, is optimistic too. "There was a one-time hit, but we expect recoveries to be very strong in the coming quarters," the bank's CFO, Lee Wai Fai, said on a same-day earnings call.

Analysts expect asset quality to remain well supported through the rest of 2022 as borders reopen and loan repayment holidays fade. However, higher inflation forecasts may drive the three lenders to increase their general provisions.

The three banks maintained general provisions for the quarter ended March 31 for anticipated credit losses.

"The banks' asset quality is resilient and the banks have set aside sufficient provisions to ride through most uncertainties in 2022," said Glenn Thum, an equity research analyst at Phillip Securities.

Thum also expects Singapore's banks to grow their NIMs, though most of that improvement may come in the second half of 2022.

As of April 28, US$1 was equivalent to S$1.39.