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@Ron18:
$DBS GROUP HOLDINGS LTD(D05.SI)$$UNITED OVERSEAS BANK LIMITED(U11.SI)$ The local banks announced their 1QFY2022 business updates. Rising interest rates took centrestage - in terms of their impact on net interest income, on their customers and credit costs, and on banks’ own portfolios which comprise high quality liquid assets (HQLA). In a nutshell, DBS Group Holdings’ 1QFY2022 net profit of $1.8 billion, up 30% q-o-q but down 10% y-o-y, just a tad outside the consensus forecast of $1.88 billion on Bloomberg; Oversea Chinese Banking Corp’s (OCBC) net profit - up 39% q-o-q but down 10% y-o-y - of $1.36 billion was comfortably above the $1.2 billion consensus forecast on Bloomberg. United Overseas Bank underperformed expectations. Its net profit of $906 million, down 11% q-o-q and 10% y-o-y, was notably below a consensus forecast of $1.02 billion. UOB’s miss was because of a one-time cost from hedging as interest rates climbed. Its trading and investment income reported a double digit drop following a $117 million loss under ‘others’. UOB group CFO Lee Wai Fai explained: “The sharp drop was mainly from the accounting asymmetry on hedges for our perpetual capital securities. These hedges were done earlier when rates were lower. They were meant to match our funding profile to the asset book repricing. However, from the accounting perspective, there is a mismatch between the mark to market line on the hedges,” Lee says. The securities portfolios of OCBC and DBS impacted their capital but not the P&L. All banks have to hold HQLA for regulatory purposes which go into the ratios of net stable fund ratio (NSCR) and liquidity coverage ratio (LCR). All three banks have ratios comfortably above regulatory minumums. However, because interest rates are rising, and these HQLA comprise sovereign bonds and so on, they fall as interest rates rise. The HQLAs are balance sheet items, and their mark to market revaluations affect shareholders funds. “Typically we have to hold HQLA as part of regulatory requirements, for LCR and NFSR. These tend to be high rated government securities. When interest rates rise, these have a mark-to-market revaluation that resulted in a decline in CET1,” explains Darren Tan, group CFO at OCBC. In addition, OCBC announced loan growth of 8% y-o-y and 1% q-o-q and these caused risk-weighted assets to inch higher, taking CET1 to 15.2% as at Mar 31 down 0.3 percentage points (ppt) q-o-q. “When rates rise, the HQLA portfolio gets marked down, it doesn’t go to P&L, but affects our shareholders funds, which fell by around $1 billion,” Piyush Gupta, group CEO of DBS, concurs. Upswing in net interest income On the other hand, all three banks will benefit from rising rates. “If short term interest rates rise faster than longer term rates in the coming quarters, our assets will generate significantly higher net interest income than the mark to market losses, which is a one-time [effect] in [1Q2022],” Lee explains, describing UOB’s loan portfolio. “We have estimated that for every 25 basis point rate increase, our net interest income will improve by $150 million on an annualised basis,” he says. According to him, UOB’s loan portfolio is sensitive to higher rates and within two to three months, around 80% of the portfolio would be repriced. Similarly, Gupta says DBS’ net interest income rises some $18 million to $20 million for every 1bp rise in interest rates. For a 100bp rise in interest rates, DBS’s net interest income could rise by $2 billion on an annualised basis. This impact includes a view that some customers may move their CASA into fixed deposits. DBS’s CASA ratio (to total deposits) was 75% in 1Q2022. DBS reported net interest income of $2.19 billion, up 4% y-o-y and 2% q-o-q, in 1QFY2022. In the meantime, as inflation and interest rate rise against a background of lower forecasts for economic growth, Gupta says DBS needs to be “more thoughtful about releasing more general provisions” going forward. In 1Q2022, DBS wrote back $112 millioin in general provisioning (which is officially known as expected credit loss 1 and 2). DBS has guided credit costs of 22bps to 25bps this year, compared to specific provisioning of 15bps in 1QFY2022. OCBC’s group CEO Helen Wong indicated that her guidance of credit costs for the year is 20 bps to 25 bps. “We see headwinds and we want to be prudent to manage our portfolio, but we are quite resilient, although there is uncertainty in the outlook,” she says. She adds that the guidance she gave in February of a 1% rise in interest rates increasing net interest margins by 18 bps and net interest income by $700 million on an annualised basis still stands. In 1QFY2022, OCBC reported net interest income of $1.5 billion, up 4% y-o-y and 1% q-o-q. UOB’s net interest income rose 10% y-o-y and 1% q-o-q to $1.7 billion, on the back of loans growth of 3% q-o-q and 9% y-o-y. Inflationary pressures Gupta raises concerns about the “second and third level impact” of the Russian-Ukraine war, such as inflation. What happens if prices go up and volumes come down, and what is the impact on margins he wonders. Some industries where margins cannot go up on the back of inflation could start creating their own little headwinds, Gupta says. “Fortunately for us, our own portfolio continues to remain resilient. We have spent the time doing a lot of stress tests on commodities, food, agri-mining and all the usual industries,” including the impact of fast moving consumer goods, and the property sector in the context of China, he indicates. Although the IMF has moderated global growth forecasts, and some economists have raised the dreaded S (stagflation) and R (recession) words, regional economies focused on commodities, could weather these trends. “As a Southeast Asia bank focusing on intra regional flows, we are less directly impacted by the Russia Ukraine conflict. Economies in our part of the world are recovering, Consumption is picking up and business activities resuming,” says Lee reading out a statement on Apr 29, on behalf of UOB group CEO Wee Ee Cheong, who was recovering from Covid. While the lockdowns in China are negatively impacting supply chains, Wee’s statement sees a positive turn to supply chain challenges. “The trade and investment corridor between Asean and China takes us in a unique position to serve customers needs. The current disruptions to global supply chain will show up the importance of the role of our region,” Lee says. @StarLuck@MSing@SR050321@HelenJanet@koolgal @TigerStars Please PICK and like.
$DBS GROUP HOLDINGS LTD(D05.SI)$$UNITED OVERSEAS BANK LIMITED(U11.SI)$ The local banks announced their 1QFY2022 business updates. Rising interest rates took centrestage - in terms of their impact on net interest income, on their customers and credit costs, and on banks’ own portfolios which comprise high quality liquid assets (HQLA). In a nutshell, DBS Group Holdings’ 1QFY2022 net profit of $1.8 billion, up 30% q-o-q but down 10% y-o-y, just a tad outside the consensus forecast of $1.88 billion on Bloomberg; Oversea Chinese Banking Corp’s (OCBC) net profit - up 39% q-o-q but down 10% y-o-y - of $1.36 billion was comfortably above the $1.2 billion consensus forecast on Bloomberg. United Overseas Bank underperformed expectations. Its net profit of $906 million, down 11% q-o-q and 10% y-o-y, was notably below a consensus forecast of $1.02 billion. UOB’s miss was because of a one-time cost from hedging as interest rates climbed. Its trading and investment income reported a double digit drop following a $117 million loss under ‘others’. UOB group CFO Lee Wai Fai explained: “The sharp drop was mainly from the accounting asymmetry on hedges for our perpetual capital securities. These hedges were done earlier when rates were lower. They were meant to match our funding profile to the asset book repricing. However, from the accounting perspective, there is a mismatch between the mark to market line on the hedges,” Lee says. The securities portfolios of OCBC and DBS impacted their capital but not the P&L. All banks have to hold HQLA for regulatory purposes which go into the ratios of net stable fund ratio (NSCR) and liquidity coverage ratio (LCR). All three banks have ratios comfortably above regulatory minumums. However, because interest rates are rising, and these HQLA comprise sovereign bonds and so on, they fall as interest rates rise. The HQLAs are balance sheet items, and their mark to market revaluations affect shareholders funds. “Typically we have to hold HQLA as part of regulatory requirements, for LCR and NFSR. These tend to be high rated government securities. When interest rates rise, these have a mark-to-market revaluation that resulted in a decline in CET1,” explains Darren Tan, group CFO at OCBC. In addition, OCBC announced loan growth of 8% y-o-y and 1% q-o-q and these caused risk-weighted assets to inch higher, taking CET1 to 15.2% as at Mar 31 down 0.3 percentage points (ppt) q-o-q. “When rates rise, the HQLA portfolio gets marked down, it doesn’t go to P&L, but affects our shareholders funds, which fell by around $1 billion,” Piyush Gupta, group CEO of DBS, concurs. Upswing in net interest income On the other hand, all three banks will benefit from rising rates. “If short term interest rates rise faster than longer term rates in the coming quarters, our assets will generate significantly higher net interest income than the mark to market losses, which is a one-time [effect] in [1Q2022],” Lee explains, describing UOB’s loan portfolio. “We have estimated that for every 25 basis point rate increase, our net interest income will improve by $150 million on an annualised basis,” he says. According to him, UOB’s loan portfolio is sensitive to higher rates and within two to three months, around 80% of the portfolio would be repriced. Similarly, Gupta says DBS’ net interest income rises some $18 million to $20 million for every 1bp rise in interest rates. For a 100bp rise in interest rates, DBS’s net interest income could rise by $2 billion on an annualised basis. This impact includes a view that some customers may move their CASA into fixed deposits. DBS’s CASA ratio (to total deposits) was 75% in 1Q2022. DBS reported net interest income of $2.19 billion, up 4% y-o-y and 2% q-o-q, in 1QFY2022. In the meantime, as inflation and interest rate rise against a background of lower forecasts for economic growth, Gupta says DBS needs to be “more thoughtful about releasing more general provisions” going forward. In 1Q2022, DBS wrote back $112 millioin in general provisioning (which is officially known as expected credit loss 1 and 2). DBS has guided credit costs of 22bps to 25bps this year, compared to specific provisioning of 15bps in 1QFY2022. OCBC’s group CEO Helen Wong indicated that her guidance of credit costs for the year is 20 bps to 25 bps. “We see headwinds and we want to be prudent to manage our portfolio, but we are quite resilient, although there is uncertainty in the outlook,” she says. She adds that the guidance she gave in February of a 1% rise in interest rates increasing net interest margins by 18 bps and net interest income by $700 million on an annualised basis still stands. In 1QFY2022, OCBC reported net interest income of $1.5 billion, up 4% y-o-y and 1% q-o-q. UOB’s net interest income rose 10% y-o-y and 1% q-o-q to $1.7 billion, on the back of loans growth of 3% q-o-q and 9% y-o-y. Inflationary pressures Gupta raises concerns about the “second and third level impact” of the Russian-Ukraine war, such as inflation. What happens if prices go up and volumes come down, and what is the impact on margins he wonders. Some industries where margins cannot go up on the back of inflation could start creating their own little headwinds, Gupta says. “Fortunately for us, our own portfolio continues to remain resilient. We have spent the time doing a lot of stress tests on commodities, food, agri-mining and all the usual industries,” including the impact of fast moving consumer goods, and the property sector in the context of China, he indicates. Although the IMF has moderated global growth forecasts, and some economists have raised the dreaded S (stagflation) and R (recession) words, regional economies focused on commodities, could weather these trends. “As a Southeast Asia bank focusing on intra regional flows, we are less directly impacted by the Russia Ukraine conflict. Economies in our part of the world are recovering, Consumption is picking up and business activities resuming,” says Lee reading out a statement on Apr 29, on behalf of UOB group CEO Wee Ee Cheong, who was recovering from Covid. While the lockdowns in China are negatively impacting supply chains, Wee’s statement sees a positive turn to supply chain challenges. “The trade and investment corridor between Asean and China takes us in a unique position to serve customers needs. The current disruptions to global supply chain will show up the importance of the role of our region,” Lee says. @StarLuck@MSing@SR050321@HelenJanet@koolgal @TigerStars Please PICK and like.

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