This year, OCBC Bank kicks off Q3 results. Local banks might experience some blips from asset quality but there will be big plus to be expected from net margins. The Q3 results of the local banks will be closely checked and monitored to determine if their 2017 rally is stronger than ever.
DBS and United Overseas Bank are expected to report Q3 results this November 3 and 6. 2017 is a great year for OCBC and DBS as they have risen for about 30% while UOB was stuck at 21%. The benchmark bull index has increased up to 16%.
As one analyst has said, “The mid-cap property stocks have risen 30 per cent in a month, why not the banks?” He also mentioned that 50% of the banks’ loans are to the property market through mortgages and construction loans.
Investors will look for the net interest margin (NIM) and the wealth management income of the banks. They will also check for any bad debts that the bank may have acquired, especially from the oil and gas segment.
According to Carmen Lee, head of OCBC investment research, higher rates should be a positive indication for banks, and even in the past up to the present day, this has been a trend.
Compared to the previous quarter, the 3-month SOR (Swap Offer Rate) and SIBOR (Singapore Interbank Offered Rate) were higher in Q3 2017. Particularly with SIBOR, it was much higher than last year. SOR and SIBOR served as the wholesale interest rates in Singapore’s interbank market.
The NIM of DBS has moved up from 1.71% in 4Q16 to 1.74% in the recent two quarters, as stated by Ms Lee. She also added, “For 3Q17, with the improvement in 3-month Sibor, we are also expecting NIM to improve for both DBS and UOB.”
The 2017 results show that DBS guided for NIM of 1.76% while UOB guided for flat or better margin. The head of OCBC investment research is also projecting 3Q17 net earnings of S$1189.8 million for DBS and S$788 million for UOB.
“Watch out for NIM trends, non-interest income and provisions and also small one-off gains from disposal of investments.Taking the cue from Great Eastern Holdings’s results, OCBC’s non-interest income should be decent,” stated by the DBS equity research analyst Lim Sue Lin, addressing the OCBC. In addition, “Although insurance income contribution would likely be lower q-o-q, this would be offset by the improved wealth management business during the quarter, which we understand, should remain strong.”
Last Tuesday, October 24, the Great Eastern Holdings (GEH), OCBC’s insurance unit posted net profit of S$235.5 million for the 3rd quarter. This ended Sept 30, 2017, 21 per cent higher compared to the last year’s S$195 million. For nine months, the net profit of the company was S$732.9 million, which is up 86% from the same period a year ago. The company stated, “This increase was due to higher operating and non-operating profit, as well as higher profit from shareholders’ fund’s investments.” According to Ms Lim, the OCBC’s expense trends should not be surprising at all, with its cost-to-income ratio that ranges at 40 to 45 per cent.
“Its NIM however could be flattish. While Sibor/Sor-related loans could start to see some repricing, its Hong Kong book may still dent NIM marginally due to the differential in the movement of its loan and deposit pricing (the relative movement of the 1-month and 3-month Hibor). Hibor (Hong Kong Interbank Offer Rate) is the key wholesale interest rate in the Hong Kong interbank market,” said Ms Lim.
Ms Lim also expects 3Q17 results to be stronger through a further improvement in NIM and a pickup in loan growth due to the recovery of the property market.
Corporate loan growth, particularly from property developers, is also expected to drive loan growth for 3Q17. “We believe it is time for its fortunes to turn based on three catalysts,” she said. And these three catalysts she’s referring to are the property market recovery, NIM improvement, and end to its asset quality woes.