Will Singapore bank earnings surge past 2%?

1Q12 results may exceed expectations as banks may have performed better on provisions and loan growth, says DBS.

But even with this potentially positive surprise, Singapore banks are projected to remain at flattish ROE growth, with acceleration only possible if banks fast-track their regionalization plans.

Here's more from DBS:

1Q12 earnings could surprise from provisions and NIM. Looking at consensus estimates, we believe market is still expecting charge-off rates to pick up. Consensus is estimating 2012 earnings growth of only 2%. Hence, we think the market may be in for a surprise with the banks possibly posting lower provisions and asset quality remaining intact. At this juncture, we are hopeful that NIM could even start to expand. Loan growth should still be decently strong at 3-4% q-o-q as banks are likely clearing off disbursements from loans approved during the earlier part of last year. Non-interest income may be volatile given the soft capital market but customer flow related treasury income will determine its sustainability. Therefore, we may be in for a decent surprise for 1Q12 results.

7% earnings growth in 2012 with possible upside risks. We are projecting 7% earnings growth for Singapore banks in 2012 on the premise that NIM and provisions remain flattish y-o-y, uptick in cost-to-income ratio is marginal while non-interest income grows at 5%. A more buoyant capital market could pose upside risks to our fee income assumptions. Meanwhile, we expect loan growth to taper off gradually over the following quarters and end the year at 12%. Most importantly, asset quality and capital remain robust, which reinforce our view that Singapore banks are a safe bet. That said, incremental improvement in ROE appears challenging and hence valuations may be range-bound for the year. Despite a 7% earnings growth, we expect sector ROE to be flat y-o-y at 11%. Further regionalization efforts could aid in accelerating ROEs.

Still prefer OCBC to UOB. We believe OCBC’s focus on non-interest income remains a positive factor, which will drive ROEs quicker over the longer term without utilising too much capital. UOB’s current share price has reflected positives and provisions could still cap earnings growth, in our view.