SINGAPORE: Analysts across the board are expecting a weaker quarterly performance from the trio of local banks in their second quarter (2Q) business update, amid a continued rise in costs and provisions.

       Earnings for the three banks are expected to peak this year as loan growth tapers off and the market braces itself for yet another potential round of rate hikes by the US Federal Reserve within the year.

       Thilan Wickramasinghe, an analyst at Maybank, said he expects the banks’ net interest income (NII) deceleration to deepen further due to higher funding costs and lower loan volumes.

       He said the banks’ first quarter NII contracted 2.7% quarter-on-quarter as net interest margins fell between one and four basis points in the same period, with the exception of DBS Bank.

       “We expect this trend to be more pronounced in the 2Q of this year, with DBS likely the least affected, given its large, low-cost liquidity base and potential safe haven flows during the United States/Credit Suisse crisis at the end of 1Q.”

       The loan segment is also expected to contract further as China’s recovery remains tepid, Wickramasinghe added.

       His point was echoed by other analysts, including S&P Global’s Ivan Tan, who believes loan growth will likely remain tepid as lending rates weigh on appetites for consumer and business borrowing.

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       Tan said that depositors have been shifting into higher-yielding fixed deposits and that the proportion of low-cost current and savings account deposits has steadily declined over consecutive quarters.

       “The realities of higher borrowing costs, coupled with still-elevated inflation, will register more prominently in 2023,” he said, adding that it could result in some “backsliding” in banks’ non-performing loan (NPL) ratios after a slight improvement last year.

       One theme that analysts are watching closely this year is the banks’ ability to manage capital.

       As interest rates continue to rise, this will inevitably lead to higher provisions. But analysts do not appear too worried, as they expect asset quality to remain “benign” in the second quarter.

       These credit costs and expenses are thus likely to remain “manageable”, said a research team at DBS.

       Even at its worst, the NPL ratio is likely to remain below 2%, said S&P’s Tan.

       Ahead of the upcoming earnings announcement, DBS Research has maintained its “hold” ratings on both UOB and OCBC Bank on high dividend yields, which would support share prices even as earnings peak.

       At a valuation of about 0.95 times the price-to-book value, DBS analysts see the duo as “undemanding”, though they do not think there are any “immediate catalysts” on the horizon. — The Straits Times/ANN