Banks' earnings growth to be subdued in 2012

But without a global financial crisis scenario, the bleak outlook in 1H12 should revert positively in 2H12.

According to DBS, non-interest income should also remain soft in 2012.

Here's more from DBS:

Loan growth to moderate, NIM to recover. After the strong loan growth of 8% per quarter in 2Q11 and 3Q11 (9M11 YTD: 22%), we expect loan growth to moderate in 4Q11. With loans expected to expand 4% q-o-q in 4Q11, full year 2011 loan growth should come in at 26%, the highest since 2007’s 22%. NIM should recover in 4Q11 as we believe banks were able to start pricing up US $ loans amid the tighter US$ funding costs.

SIBOR has since recovered to 40bps (from a low of 35bps in 3Q11). NIM took a dip in 3Q11 partly due to negative SOR blip and lower SIBOR coupled with higher funding costs for non-S$ activities (regional businesses included apart from US$ funding). Non-interest income is likely to remain soft, but positive surprises are likely as we expect the trading losses in 3Q11 to be largely reversed. We believe provisions should still be benign. Taking into account the above factors, we project earnings to grow 5% q-o-q in 4Q11 mainly from NIM recovery.

Challenging outlook for 2012. In our report dated 16 Dec 2011, we highlighted that 2012 earnings growth would be subdued given continued pressures from NIM, particularly from the funding side although the wildcard is the banks’ ability to price up loans. We have priced in higher provision charge-off rates in 2012 in anticipation of cautiousness but we are not expecting asset quality to deteriorate. Non-interest income should remain soft in 2012. Hence, we are projecting banks’ core earnings to rise 5% in 2012.

Lack catalysts in the near term; possible risk reversion in 2H12 could see interest re-emerge. Without a GFC scenario, the bleak outlook in 1H12 should revert positively in 2H12. Singapore banks, although cheap vs their ASEAN peers, lack near term catalysts but are high quality names to accumulate for risk reversion in 2H12.

Our economist is expecting GDP to bottom in 1Q12 and pick up thereafter, ending the year at 3.5% growth. We still prefer OCBC to UOB. The change of guards at OCBC’s helm should not see significant changes in policies and directions, in our view, as they are internally sourced.