Singapore banks to post record low NIMs in Q2

They are expected to pencil in 16-22bps decline, with every 10bps having a 6-8% impact on net profit.

Singapore banks are projected to post a record quarterly decline in net interest margins (NIMs) in Q2, following two rate cuts from the US as a result of the pandemic, which in turn resulted in repricing of loans throughout the period, reports DBS Equity Research.

The big three lenders—UOB, OCBC, and BDS—are expected to pencil in a 16 to 22 basis points (bps) decline in NIM for Q2 as compared to the first quarter. Every 10bps decline in NIM has a 6-8% impact on net profit, according to DBS analyst Rui Wen Lim.

"Across the banks, quarterly NIMs are expected to be near their all-time post-global financial crisis low,” said Lim, adding that the repricing effect could spill over into Q3.

Net interest income is also expected to have declined during the quarter.

The banks’ fee income is expected to bear the full brunt of the circuit beaker measures that took place from 7 April to 1 June. In particular, card fees, wealth management fees, and investment banking fees are all forecasted to decline, offset only by loan-related fees in relation to the rise in loan activity during the quarter. In Q1, DBS has already registered an 8% YoY decline in card fees, and a sharper magnitude of decline is expected for Q2.

“Whilst we expect Singapore banks to see higher assets under management (AUM) for its wealth management business due to recovery in underlying market values through Q2 as well as net new money increase, we expect an overall weak showing for wealth management fees as the closure of bank branches and circuit breaker measures would have impacted the sale of wealth products and bancassurance amongst others,” Lim said.

On the upside, loan industry growth was at 2.3% year-to-date as outstanding loans continued to decline in April and May. For the quarter, OCBC and UOB’s loan growth is expected to be marginal, with OCBC already guiding previously for muted loan growth for 2020 whilst UOB guided for mid-single digit loan growth.

On the other hand, DBS’ loan pipeline as of Q1 was healthy, although with expected further drawdown from non-trade corporate loans in Q2.

Non-fee interest income is also expected to register strong gains during the past quarter largely across the board on strong trading gains and mark-to-market improvements.

This is the same trend seen in Q1, when DBS saw growth in the business line due to gains from its investment securities; and OCBC saw a 126% YoY expansion in net investments driven by the same of debt securities as well as increase in treasury-related customer flow.

Billions in losses
Expect to see the banks write more provisions in FY2020 because of a deteriorating economic outlook in Q2, says Lim.

Already, DBS, OCBC, and UOB have already guided for 80-130bps (around $3-5b), 100-130bps, and 100-120bps of credit costs cumulatively over the next two years, respectively.

Of the three, UOB will see higher general provisions compared to its peers that have written more provisions (to P&L), as UOB took a $260m RLAR adjustment in Q1 in addition to its provisioning.

“Barring any chunky non-performing loans formation during the quarter, we believe specific provisions in Q2 may be lower than that in Q1, which included provisions for the banks’ exposures to Hin Leong,” noted Lim.

“We continue to remain watchful for H2 2020 as various government support measures taper off (such as rental rebates, wage subsidies, amongst others), which may lead to ceasing of some businesses should underlying demand of these businesses fail to recover during the Phase 2 period,” he added.

Dividends slashed
Some dividend cuts could also be expected as early as Q2. Given the steep earnings decline expected across banks for the fiscal year, banks may voluntarily cut back on dividends.

“We believe that given the steep earnings decline expected across banks in FY20F and economic uncertainty amidst a protracted pandemic, banks may likely err on the side of caution and voluntarily cut back on dividends and buffer up capital levels. Banks could also adopt scrip dividend with discount as a capital management tool—for example, OCBC’s historical scrip dividend offers 10% discount,” said Lim.

MAS are also making steps to ensure that the banks’ capital position are sound. In July 2020, the Monetary Authority of Singapore (MAS) announced that it is currently reviewing banks’ capital plans, including dividend payouts and that banks’ capital management should be approached “from a position of strength”.

MAS managing director Ravi Menon also noted that banks “should start early and not wait until the capital position starts looking weaker”.