Singapore banks hold firm even as trade war comes knocking

Earnings are poised to grow by 20% in FY18 and 9% in 2019.

Although the ongoing US-China trade dispute has already weighed in on the financial sector’s results in Q3, banks in Singapore are still in a strong position to deliver robust earnings over the next two years, according to OCBC Investment Research.

Coming to this conclusion, however, requires a level of foresight given the challenging macro conditions banks along with other industry sectors have been been struggling against.

Also read: Trade jitters could slow bank loan growth to 7% by end-2018

Net profit growth of DBS, OCBC and UOB settled between the muted range of -4% to 6% QoQ in Q3. Banking stocks have not been exempt from the global equities rout as sentiment turned cautious.

However, investors are urged to look beyond the near-term bleeding as the banking sector is still characterised by ‘healthy earnings and prudent management,’ Carmen Lee, analyst at OCBC Investment Research said in a report.

“Zooming out and looking at the 9-month report card, the three local banks reported combined net earnings of $10.9b, up 25%. By any measure, this is a strong set of 9-month results,” she said.

Also read: Could banks be the saving grace of Singapore's rattled equities market?

Net interest margin (NIM), a common measure of profitability, rose from 1.68% in Q4 2016 to about 1.80 in Q3, with expectations that NIM levels are poised to maintain their upward trend in 2019 on the back of anticipated rate hikes.

The sector’s net interest income also rose 13% although non-interest income fell marginally by 1% on the back of the global equities rout.

Fee and commission ncome grew 8%. ROE ranged from 11.6% to 12.4%.CET 1 ratio ranged from 13.3% to 14.1%, whilst total CAR ratio ranged from 16.1% to 17.4%.

The nonperforming loan (NPLs) of banks have also stabilised at around 1.6% in the past three quarters after the oil and gas and commodity downturn in 2016-2017. Allowances have also crashed 69% from peak levels in 2018 with FY18 allowances poised to amount to around $1,136m which is substantially lower than the $3,292m in FY17.

“[T]his [downward] trend is likely to continue, although current tough market conditions could see allowances going up in the next 2-3 quarters, but not back to the peak level in 2017,” added Lee.

At their current valuation that has already priced in most of the potential negative risks from the trade war, the risk-reward ratio remains favourable, she added.

The current ratio of 0.97x is still below the historical average when the FTSE ST Financials Index (FSTFN) traded from a low of 0.8x to 1.3x book in the last seven years, with the average at 1.1x. Similarly, in terms of PE, the current forward PE of 11.9x is also lower than the average of 13.7x (range of 10.6x to 16.1x).

“Whilst market conditions are likely to be challenging in the months ahead, we believe that the current business environment is not the same as during the recent trough period in 2008/2009,” she added.

There is little room to go any further down as Lee echoes market expectations of the banking sector delivering strong earnings growth of 20% in FY18 and 9% in FY19 to $14.4b and $15.7b respectively. Moreover, current dividend yields range from 3.7% to 5.7%.

“We are reiterating our overweight on the banking sector, highlighting it as one of our top picks for 2019,” she said, adding to the growing chorus of analysts pinning their hopes behind the resilience of the financial services sector as economic uncertainties deepen.