What can lift SG banks’ sector net profit in FY23?

Experts predict a 22.6% YoY increase in sector net profit.

A 22% growth in net interest income (NII) and positive jaws from moderation in operational expenditure growth will lift Singapore banks' sector net profit by 22.6% YoY in FY23, according to RHB.

In a report, RHB said it expects Singapore banks to deliver yet "another year of strong NII growth."

"Most banks believe that net interest margin (NIM) has peaked in 1Q23 due to deposit repricing. NIMs are expected to narrow sequentially in 3Q23 and 4Q23, but the slippage would be modest as the shift out of CASA to fixed deposits has slowed," RHB said.

"A resumption in US rate hikes would, however, provide some reprieve. Still, banks’ NIM would average at higher levels in FY23F vs FY22, as much of the 500bps increase in US interest rates occurred in 2H22," RHB added.

Another upside risk to earning is a pickup in fee income due to a turnaround in investor sentiment; however, RHB said earlier that hopes that fee income would strengthen in the later part of 2023, are looking increasingly tentative.

"Although card fees have recovered on the rebound in travel post lockdown, wealth management and loan-related fee income are being affected by cautious investor sentiment and weak loan growth," RHB said.

On the brighter side, RHB said banks could see "a fast turnaround in fee income prospects, should capital markets awaken from their long-bear slumber."

"SG Banks have been seeing strong inflows of net new money, but have not been able to deploy these funds due to unfavourable market conditions," RHB said.

In FY24, RHB foresees NII to only rise by 1.4% YoY as it expects NIM to narrow on higher costs of funds.

Meanwhile, RHB said investors will likely shy away from bank stocks in the immediate term following the collapse of US regional banks and the government-led merger of UBS Group and Credit Suisse.

Share prices of SG banks have fallen by 7% year-to-date.

"Singapore’s two growth engines – manufacturing and financial services – have stalled in recent quarters amid the weaker external outlook. Given investor concerns that these two sectors would continue to languish in the near term, business sentiment has turned weak, with demand for credit noticeably softer and NIM tailwinds waning," RHB said.