Analyst sees banking ROE improvement due to NIM expansion

RHB said there will be tailwinds from hikes in federal funds rate.

The return on investment (ROE) will be improved in 2023 due to the expected benefits that will uplift the net interest margin (NIM), RHB, a Malaysian bank, said.

RHB said the banks are seeing weakening in CASA deposits because of the recent rise in fixed deposit rates. Whilst the intense deposit competition and CASA deposits would mean higher funding costs ahead, tailwinds from hikes in the federal funds rate in the second half of 2022 and first half of 2023 should raise net interest income further in fiscal year 2023.

For the nine months that ended 2022, RHB said NIM expanded by 20 basis points, on a yearly basis, with DBS Bank being at the forefront of boosting the NIM.

“We believe DBS, which had a higher CASA ratio of 60.3% at end-3Q22, would be better positioned to deliver NIM improvement. UOB’s CASA ratio stood at 49.8% while OCBC’s was 56.1%,” it added.

Singapore banks will also be in a good position to mitigate the external headwinds, following the robust capital.

“Aside from having a very comfortable provision coverage, banks also have robust capital buffers. As at end-3Q22, DBS’ CET-1 ratio stood at 13.8% (14.4% for OCBC and 12.8% for UOB). This should enable banks to keep to their dividend payout plans,” said RHB.

Key downside risks are: “i) A sharper-than-expected downturn in global economies, ii) escalation of the Russia-Ukraine war that would further disrupt commodity exports and intensify inflationary pressures, and iii) a significant deterioration in asset quality."