• Good 1H24; what’s next? SG Banks had a good 1H24 ie share price performance. Flipside, dividend yield, SG Banks’ main near-term thesis, has been compressed and is now close to that being offered by the market, making it a challenge for the sector to meaningfully outperform the market in 2H24, especially nearing the rate cut cycle. Our stock picking framework remains dividend yield and growth. Top Pick: DBS on its absolute DPS commitment with potential upside from capital management. Still NEUTRAL.

• Banks’ share price and earnings performance review. SG Banks posted strong 2Q share price performance, buoyed by expectations that the Federal Funds Rate (FFR) cut will be pushed back leading to fewer cuts for this year (positive for NII and bottomline), as well as a good set of 1Q24 results. DBS was the best performer thanks to its attractive dividend yields and robust results. 1Q24 reporting quarter saw SG Banks generally beat expectations on non-II and credit cost. Operating income rose 9% YoY (+8% QoQ), led by higher non-II (+16% YoY, +31% QoQ) as treasury, insurance and fees all did well. NII rose 4% YoY (flat QoQ) on asset growth (+5% YoY, +3% QoQ). Meanwhile, CIR was stable YoY at 39.4% (4Q23: 44.8%) as was sector credit cost at 19bps (1Q23: 18bps; 4Q23: 20bps). With that, 1Q24 sector PATMI was up 8% YoY (+21% QoQ). We raise our FY24F-26F sector PATMI by 4-5% pa during the reporting season.

• 2024 topline prospects looking better but visibility beyond that is lacking. SG Banks are more positive on topline prospects for this year, thanks to: i) A dial back in US FFR cut expectations; ii) positive investor sentiment, which appears to have been sustained in 2Q and would be good for wealth fees; and iii) strong treasury and investment income realised in 1Q, giving cause for another year of healthy contribution. As a result, OCBC thinks full-year NIM could land at the upper end of its guided range while UOB expects NIM to improve in the quarters ahead on efforts to lower deposit cost. Meanwhile, DBS guided up its 2024 operating income growth expectations to a mid-high single digit from the earlier mid-single digit. On asset quality, the banks have not noticed anything systemic and 1Q allowance levels were generally tracking below guidance, which is retained for now. However, while loans growth got off to a decent start, SG Banks have retained their low single-digit growth expectations, citing a less robust pipeline ahead and global uncertainties. All in, PATMI expectations were slightly more upbeat with DBS expecting slight PATMI growth this year (flat YoY previously) while OCBC thinks ROE could end up at the top end of its 13-14% guided range.

• Earnings forecasts. We expect sector 2024F PATMI to inch up 3% YoY, down from the +25% YoY in 2023 but an improvement from the previously expected YoY dip. The moderation in growth is mainly due a more modest +4% YoY operating income growth projection (2023: +21% YoY) on a 3bps NIM squeeze and slower non-II growth. Upside risks stem from the continued non-II strength and benign asset quality while downside risks would likely be around operating income, ie NIM and non-II.

• Maintain NEUTRAL. With the sector’s earnings outlook likely to stay muted, we see dividend growth as the main driver for SG Banks’ share price performance. DBS is best positioned to deliver on this. We would also watch out for OCBC’s bid to privatise Great Eastern Holdings (GE SP, NR). If the SGD1.4bn bid is successful, the impact to CET-1 capital is 60bps. If not, we think it is possible OCBC could opt to dividend up a portion of the 60bps (31 SG cents/share).

Source: RHB Securities Research - 27 Jun 2024