Singapore bank profit growth to continue with fee income recovery, stable NII

Singapore's largest banks are likely to extend their profit run after posting better-than-expected results in the quarter ended March 31, as a continued recovery in fee income and stable net interest income bode well for further earnings growth.

Net profit at DBS Group Holdings Ltd., the city-state's largest bank by assets, jumped 15% year over year in the first quarter to S$2.96 billion, helped by higher fee income and loan growth. Similarly, fellow lender Oversea-Chinese Banking Corp. Ltd. (OCBC) reported a 5% yearly increase in its first-quarter net profit, to S$1.98 billion from S$1.88 billion.

While net profit at United Overseas Bank Ltd. (UOB) ticked down to S$1.49 billion from S$1.50 billion a year ago, those results include one-off integration expenses associated with the bank's acquisition of Citigroup Inc.'s consumer banking business. Without the one-off expenses, the bank's core net profit fell 1% to S$1.57 billion from S$1.58 billion.

Singapore banks should be able to continue to grow their profits for the rest of the year, thanks mostly to fee income gains, as well as net interest income (NII) remaining stable, said Glenn Thum, senior research analyst at Phillip Securities Research.

"Loans growth recovery would also provide the uplift to net interest income if [net interest margins (NIMs)] were to dip slightly," Thum added.

The three banks easily beat GAAP net income consensus mean estimates. Analysts had projected DBS' first-quarter net profit at S$2.48 billion, OCBC's at S$1.80 billion and UOB's at S$1.41 billion.

Fee income recovery

Continued recovery in fee income and stable net interest income stands to drive profits in the remainder of the year.

"The results were slightly above our expectations. This mainly came from fee income growth as well as net interest income not declining as fast as expected," Thum said.

DBS said net fee and commission income rose 23% year over year to S$1.04 billion, led by a 47% jump in wealth management fees. OCBC's net fee and commission income came in at S$479 million, up 6% on year and driven by wealth management, brokerage and fund management fees. UOB's net fee income rose 5% to S$580 million from S$552 million.

Customers' expectations for interest rate cuts to happen in the second half of the year led them to have "a more risk-on sentiment as they shifted funds from fixed deposits and [current accounts and savings accounts] into higher-yielding investment products, leading to the rise in the banks wealth management [asset under management] and fee income," Thum said.

In addition, Singapore banks are likely to keep their net interest margins stable as the US Federal Reserve has deferred interest rate cuts for now. In its most-recent meeting on May 1, the Fed decided to hold the federal funds rate in the 5.25% to 5.5% range.

While NIM was likely to be a bit challenging this year, the Fed's decision has helped the bank's NIM to hold up "stronger than we thought," said UOB CFO Wai Fee Lee during the bank's May 8 earnings call.

"Singapore banks have continue to enjoy good profitability, thanks to the higher-for-longer interest rate environment, which we believe would prolong the high interest margin run," Ivan Tan, a banking analyst at S&P Global Ratings, said.

Ratings economists expect the first Fed rate cut this cycle in December.

Hidden dangers

There may be some hurdles lurking for banks in the higher interest rate environment even as it benefits their NIMs, according to industry analysts.

Ratings' Tan expect the banks' loan growth to be subdued as higher borrowing costs in a higher rate environment deter borrowers.

However, there will likely be a modest increase in loan growth to around 3% in 2024 as companies will need to borrow for investment and capital expenditure, Tan added.

UOB CEO Ee Cheong Wee said during a May 8 earnings call that the bank expects low-single-digit loan growth for 2024. OCBC also expects low-single-digit loan growth for 2024.

"Higher-for-longer interest rates increases asset quality risks, especially amongst [small and medium-sized enterprises]. So this is a risk that needs close monitoring," said Thilan Wickramasinghe, head of Singapore research at Maybank Securities.

As of May 27, US$1 was equivalent to S$1.35.