Loan growth is now dissipating as an NII driver. Banks can only depend on saner pricing to drive their NII. Indeed, there has been some re-pricing since Q4 2011, though this has been spurred by rising funding costs over Q4.
As loans take time to be re- priced, the back books will still not reflect the higher funding costs, so NIMs should still be pressured. Positives will only surface in subsequent quarters, we believe.
By far, the biggest re-pricing opportunities have come from large corporate loans (+50 basis points to +100 basis points), although even mortgage pricing has been tweaked up by 10-20 basis points.
Capital market-related fees and treasury income will not be strong either. Q4 is seasonally weak and increased risk-aversion would have induced an early winter break for traders and clients.
As data points, US and UK investment banks had a fairly poor season. While trading income was muted, global investment banks' earnings were further affected by staff severance packages and a high fixed-wage structure.
Singapore banks are not the same. We think cost alignment was unlikely to have bogged them down in Q4, though slower capital markets were a universal phenomenon.
DBS is due to release its Q4 2011 results on Feb 10. We forecast a $700 million net profit (-8 per cent q-o-q) vs consensus' $687 million. We expect PPOP (-3 per cent q-o-q) to be down marginally because of lower non-interest income.
Singapore equity-market volumes were at one of their lowest in recent years, so capital market and trading income would have been muted for all Singapore banks. Corporate transactions likely slowed substantially as well.
DBS had beaten expectations in recent quarters by cross-selling treasury products to generate client-driven treasury income. As customer flows tapered off in Q4, we think treasury-related revenues cannot be expected to stay high for DBS either.
We expect loan growth to slow to 4 per cent q-o-q. More pertinent data points would be: 1) whether it sustained its rapid US$ loan growth; and 2) guidance on margins (have they bottomed out?). The biggest re-pricing opportunity today is among large corporates and as a corporate bank, DBS would be the clearest beneficiary.
The bank's ability to re-price corporate loans comes about because the cost of borrowing in US dollars has gone up tremendously for all banks. A year ago, DBS could borrow in Hong Kong at 10 basis points over Libor but in Q4 2011, interbank quotes were as high as 150 basis points over Libor.
OCBC is due to announce Q4 2011 results on Feb 20. We expect a net profit of $582 million (+13 per cent q-o-q), in line with consensus forecast of $582 million. We expect PPOP (+14 per cent q-o-q) to be up, largely due to an easy comparison with a weak Q3 2011.
The last quarter was weighed down by trading losses and non- par fund losses at Great Eastern, so some reversion might come on. We do not expect trading losses to recur, though a strong rebound in treasury revenue is unlikely either, especially in a seasonally weak and quiet quarter.
OCBC's wealth-management outfit, Bank of Singapore, should report very strong AUM growth but we doubt this will translate to a like-for-like improvement in wealth-management-related income.
Our ground checks with Singapore private bankers suggest that although 2011 AUM growth could be in the range of +30 per cent y-o-y, profitability was probably flat.
On the lending side, OCBC had been newly aggressive in the domestic market, judging by a comparison of mortgage rates. Such aggression should not be at the expense of margins though, since mortgage rates for the three banks had been raised in Q4 2011 (est +20 basis points).
For UOB's Q4 2011 results, we forecast a net profit of $574 million (+10 per cent q-o-q) vs consensus $578 million. We expect PPOP (+4 per cent q-o-q) to be up because of a recovery in trading incomes.
Trading-related income took a hit in Q3 mostly from forex, with UOB wrong-footed by US dollar strength. We think that losses should unwind as the US dollar weakened in Q4.
Although that would be positive, it might yet be offset by actualised losses from the disposal of its European bank-debt portfolio; we don't think the losses will be big.
Recently, UOB pared down its European Union (EU) bank exposure aggressively from $1.5 billion (end-Q3) to $1.2 billion (November) to about $800 million now.
In January, global bank bonds had their strongest month after the European Central Bank injected 489 million euros (S$801 million) into the eurozone's banking system to avert a liquidity crunch, possibly offering UOB a window to unwind much of its EU bank papers. UOB's net exposure to EU bank debt has been reduced and the previous negative EU association should fade.
NEUTRAL
No comments:
Post a Comment