Singapore banks net income growth to level off in Q3 2023 as margins peak

Singapore's three largest banks are expected to report year-over-year gains in their net income for the third quarter, though growth may slow as margins have peaked.

DBS Group Holdings Ltd., Southeast Asia's biggest lender by assets, may report a net income of S$2.50 billion in the July-to-September quarter, up from S$2.24 billion in the same period in 2022, according to the mean estimate of analysts on S&P Capital IQ Pro. Oversea-Chinese Banking Corp. Ltd. (OCBC) is expected to report net income of S$1.79 billion, compared with S$1.61 billion a year ago, while United Overseas Bank Ltd. (UOB) may post a gain to S$1.46 billion from S$1.40 billion, the estimates data show.

UOB is scheduled to report its third quarter earnings on Oct. 26, followed by DBS on Nov. 6 and OCBC on Nov. 10, according to stock exchange filings.

"We believe that earnings for 2023 will remain strong on the back of good interest margins, noting that interest income contributes the bulk of revenue for Singapore banks," said Ivan Tan, an analyst at S&P Global Ratings.

Singapore's banks have gained from higher net interest margins (NIMs) as global central banks, particularly the US Federal Reserve, have raised rates since early 2022 to curb inflation. The Fed held rates steady at its Sept. 20 review but has left the door open to further increases if necessary. The Monetary Authority of Singapore was among the first central banks in Asia to tighten its policy when it set the local dollar on a slightly steeper path of appreciation against the currencies of the nation's main trading partners in October 2021.

"We forecast interest margins will remain robust for the rest of 2023, before peaking at 2.0% to 2.2% in 2024. Singapore lending rates are correlated with the US Fed rate, and we anticipate one more rate hike in this tightening cycle, with peak rates persisting into the second quarter of 2024," Tan said.

Singapore bank chiefs have also flagged the impact US interest rates may have on their NIMs.

"When we spoke the last time, we sort of figured the rates were topping out and since then the Fed has actually had hikes that we've not taken into account," DBS CEO Piyush Gupta said during the bank's August second-quarter earnings call. The CEO said there could be "a couple of basis points upside from the second quarter" in the lender's NIM in the third quarter.

DBS Group's NIM is estimated to be 2.17% in the third quarter, up from 1.90% in the prior-year period and 2.16% in the previous quarter. OCBC's NIM is also expected to climb year-over-year to 2.27% from 2.06%, while UOB's NIM is expected to be 2.12% for the third quarter, up from 1.95% in the third quarter of 2022, according to the estimates.

"We expect slowing net interest income. NIMs should be supportive but could be partly offset by weak loans. Fees are unlikely to provide much growth with wealth management still in the doldrums," analysts from Maybank Securities, Singapore wrote in an Oct. 12 report.

Bank CEOs have previously said that the second half will be more challenging. DBS CEO Gupta expects "low single-digit loan growth" for the full year. OCBC and UOB also expect single-digit loan growth for 2023. At OCBC's Aug. 4 earnings briefing, CEO Helen Wong predicted "low to mid-single-digit loan growth potentially at the lower end" while UOB CEO Ee Cheong Wee expects "low to mid-single-digit loan growth," Wee said in a July 27 briefing.

Maybank Securities, Singapore analysts expect "increasingly cautious guidance" from the banks and a possible increase in cautionary provisions. "On the other hand, loans fell -1% YoY in 2Q23. Weak demand for trade-related debt was a key driver. Continued weakness in China, plus accessibility of cheaper domestic funding, could likely drive further contraction in volumes," the analysts wrote.