Banks modest for Q4 2019 due to slow loan growth, weak NIMs

But high FY2019 momentum should present higher dividends.

The banking sector sees a moderate Q4 2019 with slow loan growth and weak net interest margins (NIMs) as dwindling interest rates reflect on asset yields, said a Maybank Kim Eng report.

But positive momentum in FY2019 and sturdy capital levels should open potential for higher dividends, particularly for DBS and OCBC.

December system loans lagged to 4.2% YoY, the slowest since June 2019, mainly due to Asian currency unit (ACU) lending slugging across almost all segments. Analyst Thilan Wickramasinghe believes that this is partly reflective of the weaker North Asian macro and some year-end window dressing by corporate borrowers.

The impact of the Singapore Interbank Offered Rate (SIBOR) tightening 22bps since the start of Q3 2019 should manifest in Q4 NIMs as asset yields are revised down.
“We expect a seasonal slowdown in wealth/fund management fees (40% of sector fees) given the holiday period in Q4. However, continued contraction of interest rates during the quarter may give rise to stronger trading & investment security income. In Q319, this increased 37% YoY largely from falling rates,” Wickramasinghe wrote.

On the other hand, interest rates remain higher compared to 2018. As such, Maybank expects earnings momentum to stay positive year-on-year. There is a potential for higher dividends with CET1 at strong levels, with DBS and OCBC having a higher likelihood of this.