13 August 2018
Carmen Lee, Head, OCBC Investment Research
Good set of second quarter results; guidance is still positive
Despite trade tensions and the risk-off mode in the market, the three local banks reported a relatively good set of 2Q18 results. More importantly, the guidance is still fairly positive as all three banks expect loans growth to come in around the mid-to-high single-digit level.
With two rate hikes so far by the US Federal Reserve (in March and June) and two more expected for this year and four more expected in 2019, outlook for Net Interest Margin (NIM) is positive as banks guided for NIM to stay at current or higher levels. As a recap, 2Q18 NIM was 1.67% for OCBC, 1.83% for UOB and 1.85% for DBS.
In addition to improving margins, allowances have generally dropped quarter-on-quarter (QoQ) and non-performing loans (NPL) ratios have also stabilized.
Historically high quarterly profits
Stripping out exceptional one-off items, both OCBC and UOB reported the highest quarterly net earnings in 2Q18. Based on current consensus estimates from Bloomberg, net earnings growth is projected at 21% in FY18 and 11% in FY19 – record earnings for the banks.
This underscores optimism in terms of growth expectations for both net interest income and non-interest income. For the former, 2Q18 saw improvements on both year-on-year (YoY) and QoQ basis for all three banks ranging from 2-5% QoQ and 8-18% YoY.
Show me the money!
Apart from broad-based improvement, including the returns on equity (ROE) and generally robust capital ratios, what stood out strongly this quarter was the generous serving of dividends.
DBS dished out 60 cents interim dividend (versus 33 cents in the previous year), while UOB announced 50 cents (versus 35 cents) and OCBC declared 20 cents (versus 18 cents).
This amounted to an 11%-82% jump in interim dividends.
On an annualized basis and based on current prices, this translated into dividend yields of 3.5%-4.5%.
Tactical overweight on the banks
Property cooling measures will rein in mortgage growth rate, especially from FY19, but we expect this to be mitigated by other areas of growth including cards, investment and higher trading income.
With lower allowances, improving margins and healthy dividend pay-out ratios and yields, we remain fairly optimistic on the outlook for the banks for the coming 1-2 years.
At current prices, we have BUY for both DBS and UOB.
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