Singapore banks to record flat EPS growth in 2020

Any revenue expansion will be offset by increases in credit costs.

Singapore’s top three banks are expected to record flat earnings per share (EPS) with a 0-3% growth in 2020, according to Jefferies Equity Research.

 Any revenue growth, estimated to fall between 2-5%, will be offset by 2-5 bps increase in credit cost and slightly lower efficiency, said Jefferies equity analyst Krishna Guha.

Business volumes were noted to have grown slower than expected, blamed on mortgages.
Meanwhile, margins fared better whilst credit cost was inline ex-OCBC.

But loan growth may still turn for the upside, depending on shifts in supply chain as well as market share gains in mortgage refinancing, noted Guha.

““We note that decline in USD/SGD interbank rates and flattening of the yield curve has paused since late October. Whilst margin outlook is bleak, faster growth in deposits should help banks to tweak deposit rates and/or grow WM income. Capital market activities are also likely to help non-interest income. We also note that negative revisions for FY20 EPS have slowed down,” he added.

Of the three banks, DBS continues to lead in terms of improving its profitability, raising profits 2.2ppt to 15%. UOB has managed to maintain its profitability at c.14%, whilst OCBC has seen its profits decline 3.4ppt to 12.3%.

For 2020, Dividends of DBS and OCBC are expected to increase, whilst UOB’s dividends will likely remain flat, reported Guha. But UOB will record higher EPS growth due to its ASEAN exposure.

However, although UOB is expected to deliver higher growth than its peers, its margin trend as well as its exposure to Hengfeng Bank may lower its chances, noted Guha. Hengfeng Bank took a partial bailout from the Chinese government in August 2019 amidst a funding crunch that has beset China’s financial sector.

Meanwhile, OCBC’s currently faces an M&A overhang and above-normal credit costs, noted Guha.

“DBS has increased RoTA by 20 bps versus 3-4 bps improvement for peers over the period. Rising rates have benefited DBS, but even if we factor that in, the group has been able to improve RoTA at a faster pace than peers. More interestingly, when we look at returns over various periods of rate cycle, DBS has been able to maintain returns at same level as 2004-07 cycle. In our view, this is quite remarkable given that 2017-2018 rate hike cycle has been more muted than the prior cycle and loan to deposit ratios are higher to begin with. Relatively, both OCBC and UOB have seen asset returns decline by c.17bps,” the report read.