Singapore bank Q1 earnings - lukewarm expectations

Following the slide in global equity market into the end of 2018, Singapore banks had seen share prices ascend alongside the broad market, chalking up gains of between 4-16% year-to-date (YTD). The relatively impressive upturn had been backed by a recovery in broad market sentiment and conditions. That said, the uncertainties that had been outlined at the start of 2019 certainly remains as we head into Q2 and await further direction in where growth is headed.

Supportive macro picture

As the S&P 500 index tread within 1% from its all-time high ahead of US tech earnings, the local Straits Times Index had clocked its own stellar 9% YTD gains into late April. While there had been little material changes in outlook since the start of the year for the Singapore economy, wherein expectations are still for slowing growth as shown in the latest Monetary Authority of Singapore (MAS) outlook, macro factors had certainly been present to effect a change from the overt pessimism present into end-2018. A benign Fed outlook, turnaround in China’s data and alleviation of worries over US-China trade issue were just some of which to name. This had seen the local STI trading above its 200-day moving average since mid-January and printing fresh highs from June 2018.

Source: Refinitiv

Single-digit NIMs growth

Looking at how the abovementioned macro improvement translates to local banks’ first quarter performance, there appears to be a broad sense that the banks would see to quarterly upticks, though paling in comparison to the strong Q1 2018 performance. While the Fed had pledged a patient stance with regards to interest rates and went insofar to invoke the dovish potential for a rate cut in the next rate move, net interest margins (NIMs) are nevertheless expected to pick up in Q1. NIMs serve as a measure of the difference between the income generated and costs on interest earning assets relative to its total amount, and thus representative of the banks’ lending businesses. Singapore’s 3-month SIBOR, which typically leads banks’ NIMs, was seen climbing through to 1.94% in March from around 1.77% in end-2018.

This is set against the lukewarm bank lending growth seen in the first two months of Q1 at an average of 3.23% year-on-year (YoY), up from 3.07% in Q4 2018 which should see to interest income improvements.

On non-interest income, one would recall that banks had been plagued by poor performances in this category last quarter including the weakness shown in wealth management. With the improvement in market conditions into 2019, the pain in the area is expected to have been alleviated, particularly when compared on a quarter-on-quarter basis. Meanwhile, any concerns on credit costs are expected to remain at bay in the first quarter. As far as the market is concerned, there remains a ‘buy’ rating attached to the trio of local banks according to Refinitiv polls with Singapore’s largest bank DBS leading the flock.

Source: Refinitiv

Technical analysis

As the first to release their bank earnings, the perception towards DBS’ results would likely ripple across to the prices for the trio of banks. Watch the performance against consensus and guidance here for any surprises that could see prices make a strong attempt of the resistance at $27.57 after the upward momentum picked up of late.

Over and above DBS’ performance, any disappointments in the other two may also find substitution effect that could see to changes in prices, one to watch over the earnings season. The macro backdrop in terms of US-China trade negotiation progress and data updates would also play a part with the turn of the month.