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Singapore banks Q1 2023 earnings – Banks’ outlook likely to be the key focus

The three local banks are set to report their Q1 2023 earnings over the coming weeks, with UOB leading the pack.

Singapore Banks Source: Bloomberg
Singapore bank earnings dates Source: Refinitiv

The three local banks are set to report their Q1 2023 earnings over the coming weeks. Year-to-date performance has seen OCBC (+5.0%) leading the pack, while DBS (+0.4%) and UOB (-3.3%) largely trailed behind. The outperformance in OCBC has been reflected in its one-year performance as well.

With the local banks accounting for more than 40% weightage in the Straits Times Index, the combined banks’ performance has allowed the index to eke out a slight positive gain of 3% year-to-date. However, compared to the rest of the region, this may be a relatively weaker showing, considering that renewed traction towards growth stocks amid expectations for an impending rate pause from the Federal Reserve (Fed) have a limited impact on the value-focused STI.

Singapore bank Q4 vs Q1 Source: Refinitiv
Total return year-to-date (DBS, OCBC, UOB, STI) Source: Refinitiv

Largest tailwind from interest rate upcycle environment could be behind us

A look at the local borrowing costs in 1Q 2023 suggests that the largest increase in the interest rate upcycle environment could potentially be behind us. This follows as expectations are firm that the Fed will deliver its last 25 basis-point hike in the May meeting, before keeping rates on hold until November/December. How much more room the banks’ net interest margin (NIM) can increase and continue to do the heavy-lifting for earnings outperformance will certainly be put into question.

Meanwhile, further catch-up on funding costs are likely to continue to bite into the banks' margin outlook as costlier fixed deposits are preferred compared to low-cost current and savings account (CASA). The delayed effect from the Fed’s interest rate outlook and funding costs may still aid to drive some resilience in current results, but outlook guidance from the banks will surely be the greater focus here.

Banks' net interest margin versus average 3-month SORA/SIBOR Source: The Association of Banks in Singapore (ABS), Monetary Authority of Singapore (MAS)

Continued slowdown in loan demand since the start of the year

Singapore’s bank lending data revealed that the total loans and advances have continued to moderate since the start of the year, which may support the view that loan demand could have seen its peak in August last year. Businesses loans saw a 4.5% year-on-year decline in February while consumer loans fell 0.9% from the previous year. At least for now, consumer loans could continue to deliver a more resilient showing in 1Q 2023, with the faster growth in Singapore 1Q 2023 home prices suggesting that higher interest rates and the series of property cooling measures have yet to dent the appetite for new properties.

That said, downside risks to economic conditions remain on the table, with a pause in tightening by the Monetary Authority of Singapore (MAS) this month while guiding for a deeper-than-anticipated slowdown. Previous guidance from the local banks are that their loan books are expected to see a mid-single-digit growth in 2023. Any downward revisions to their projections could come as a negative surprise by pointing to a more precarious economic outlook.

Total loans & advances (Businesses & Consumers) Source: Refinitiv

Economic outlook still uncertain and clues will be sought in upcoming results

With lingering talks of recession following the recent banking fallout, the build-up in the banks’ loan losses allowances will provide some clues on the perceived financial stress on businesses and consumers over the coming months. For now, one can also hardly be convinced that economic conditions have seen its bottom, with the mixed outlook ahead likely to put downward pressure on the banks’ wealth fee income for longer.

The pocket of optimism is that fee income from credit cards may still remain resilient, tapping on the delayed tourism recovery across the region for a boost. With that, the upcoming results will be a game of balance. Any resilience from the upcoming numbers could still be short-lived until the global economic headwinds clear, with all eyes on the management’s guidance to provide any much-needed reassurances.

SGX institutional fund flow data revealed 2 consecutive months of outflows in financials

The SGX fund flow data has revealed consistent net institutional outflows from the financial sector in recent weeks, with combined S$1.5 billion outflows since February this year. While the global banking crisis fears have somewhat eased, the local banks’ share prices have struggled to sustain above their respective pre-SVB fallout levels. Tighter credit conditions in the crisis’ aftermath, along with an impending pause in the Fed’s rate hike cycle, could be catalysts driving some paring of exposure in the local banks among institutional investors despite their relatively stable capital levels.

Cumulative Institutional Fund Flow (S$M) - Net Buy/Sell Source: SGX, IG

DBS share price: Technical analysis

DBS share price has been trading within a symmetrical triangle pattern since March this year, which represents a period of near-term indecision (consolidation). Rising moving average convergence/divergence (MACD) points to building upward momentum but it seems that the S$33.50 resistance level will have to be overcome in order to provide greater conviction for the bulls. On the downside, any breakdown of the symmetrical triangle below the S$32.15 level could pave the way to retest the S$31.35 level next.

DBS Source: IG charts

OCBC share price: Technical analysis

OCBC share price has been well-supported by an upward trendline to deliver a series of higher lows since July last year. The formation of recent bullish pin bars at a 61.8% Fibonacci retracement level points to some dip-buying, which keeps the S$12.65 level as a key support to watch. On the upside, the S$13.00 level will be a crucial resistance to overcome.

OCBC Source: IG charts

UOB share price: Technical analysis

UOB share price has been largely stuck in a range over the past weeks, failing to overcome its 100-day moving average (MA) despite multiple retests. Any breakdown of the crucial S$29.60 level may provide conviction of bears in greater control, with a bearish cross on MACD pointing to a reversal in momentum to the downside. Failure for the S$29.60 level to hold may open the door to retest the S$28.20 level next.

UOB Source: IG charts

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