To The Moon

$DBS GROUP HOLDINGS LTD(D05.SI)$ The three Singapore banks (DBS, OCBC, and UOB) all reported record profits for the first quarter of 2023. However, their outlook for the rest of the year is more muted. Moreover, since their 1Q23 reporting, share prices have been coming down as US banking turmoil and political deadlock on US debt ceiling may in turn have a negative impact on SG banks. Have NIMs expansion for SG banks peaked? The outlook on the Federal Funds Rate hikes has changed a bit through the last quarter, and three more 25bps hikes now seem unlikely. On the other hand, deposit rates are creeping up with the customary 5–6-month lag behind the asset yields, raising the cost of funding. DBS's NIM grew by 7bps QoQ, unsurprisingly, as it has the highest current account savings account (CASA) deposit base of the three banks. OCBC's NIM was marginally down by 1bp from HIBOR weakness in the quarter, which affected asset yields in North Asia. UOB had a negative surprise of -8bps largely due to a fixed-deposit gathering drive, which raised funding costs (CASA was stable QoQ at around 48%). Loan growth a lot more moderated now Loan growth was also tepid in 1Q23 and guidance from all three banks were revised down from mid-single digits in the previous quarter to low- to mid-single digits now. For 1Q23, DBS leads with +1% QoQ growth, while the other two are flat or marginally negative. All banks broadly indicated that borrowers are quite cashed up and lower rates in China have also driven some loan outflows. In other words, the banks are facing some challenges. The NIM is likely to remain flat in the near future, and loan growth is expected to be slower than previously expected. Recovery of non-interest income sooner than expected, is it the next catalyst? Most sell-side analysts previously thought that wealth fees would only start recovering in the second half of 2023 after the rate hike cycle ends. However, it seems like this recovery has started sooner than expected, with DBS seeing a 40% QoQ jump in wealth fees, OCBC seeing a 37% increase, and UOB seeing a 27% increase! Wealth assets under management has grown at low-single-digit levels even through 2022. This quarter, both DBS and UOB saw net new money of around S$6 billion, while OCBC saw net new money of around S$12 billion. More upside can be expected through 2023, perhaps at a more moderate pace than in 1Q23. Other areas of non-interest income are flat or growing QoQ at a modest pace for all three banks. The only exception was UOB, which saw a very high level of trading and investment income, which is largely driven by opportunistic liquidity management activities. Looking ahead, wealth management fees will likely continue to recover, and that other segments of Non-II will also grow, albeit at a more moderate pace. Asset quality sound, but Banks are cautious All three banks have not changed their specific provisioning credit cost outlook for the year, which is 10-15bps for DBS, 15-20bps for OCBC, and 20-25bps for UOB. Non-performing loan ratios were also flat QoQ for DBS and UOB, or slightly down for OCBC (by 10bps). New non-performing asset (NPA) formation is also benign, with recoveries coming through at a quicker pace than new formation. While asset quality looks sound and the banks do not see specific stress on the book in any particular sector from a bottom-up portfolio basis, the tone is a bit more cautious than in the previous quarter due to macro slowdown which does affect the banks' GP estimates. The three banks are monitoring the situation closely and will adjust their provisioning and other measures as needed. Conclusion: Banks still my favourite SG picks. Despite potential headwinds of a peak in NIM expansion and slower loan growth, the non-interest income segment has recovered quicker than expected. As such, their revenue growths are likely to continue at roughly mid-single-digit levels. Cost-to-income management seems to be on a structural improvement path too, with the digitization efforts undertaken by the banks. Our SG banks are among the companies with the highest ROE, and hence one of my favourite sectors in SG. Overall, I am positive on the outlook for the Singapore banking sector in 2023 as they will likely benefit from the recovery of the global economy, as well as the ongoing digital transformation of the financial industry. @TigerStars @Daily_Discussion