DBS, OCBC and UOB achieved strong financial performance in 2021

• Singapore’s three major banks’ net profit grew as NPL and NIM remain stable
• Profitability of the three banks is expected to grow in 2022
• Each of the banks faced challenges that may lead to downside performance in 2022

DBS’ full-year 2021 net profit grew 44% year-on-year (YoY), OCBC at 35% and UOB at 40% as the outlook for the sector remains strong. It is also supported by the easing of COVID-19 restrictions and banks reviewing their dividend payout ratio and paying more dividends to shareholders.

Singapore’s three major banks’ net profit grew as NPL and NIM remain stable

DBS led the banks with a net profit of SGD 6.80 billion ($5.02 billion) in 2021, up 44% from 2020, resuming a trend of consistently increased earnings that was disrupted during the pandemic in 2020.

DBS’ loans grew by 9%, the largest growth rate since 2014. Non-trade corporate loans increased by 8%, while deposits increased by 7%. Strong current and savings account (CASA) inflows persisted for a second year, allowing for the discharge of higher-cost fixed deposits. Asset quality improved in the fourth quarter. Non-performing assets fell 11% from the previous quarter. The non-performing loan (NPL) rate declined to 1.3% from 1.5% due to cash recoveries of large corporate NPLs. Net interest income fell 7% to SGD 8.44 billion ($6.19 billion) as the full impact of interest rate cuts in the previous year was moderated by broad-based loan growth. Net interest margin fell 17 basis points to 1.45%, with most of the decline occurring in the first half of 2021. NIM’s improvement will be dependent on the number of rate hikes and also timing will matter on how it will evolve in 2022.

Piyush Gupta, CEO of DBS, said, “As we did our scorecard appraisal for the year, it was clear it was the best business and financial performance we've had in at least a decade. Despite the collapse in interest rates which resulted in almost SGD 3 billion ($2.2 billion) of lost revenue compared to 2019, we delivered record profits. And the profit pool was very broad-based”.

OCBC announced a net profit after tax of SGD 4.86 billion ($3.59 billion) for the financial year 2021. Its profit is up 35% from the previous year, thanks to robust growth in non-interest income and lower allowances, which more than offset a drop in net interest income due to low interest rates. OCBC’s continued momentum drove loan growth up 8% YoY to SGD 290 billion ($212.64 billion) as loan portfolio continued to be well-diversified across industries.  Customer deposits grew 9% YoY to SGD 342 billion ($252 billion), led by higher CASA deposits, up 14%. NPL ratio is stable YoY and QoQ at 1.5%. TABInsights expects OCBC’s NPL ratio to be largely stable in 2022, with borrowers' finances supported by the economic upturn. Higher recoveries/upgrades and write-offs were offset by a rise in new non-performing assets (NPAs) in the Q4 of 2021. The bank registered a 14% decline in net profit in the Q4 to SGD 973 million ($723 million) due to higher expenses and lower trading income as it missed some analysts’ market estimates.

Helen Wong, newly appointed CEO of OCBC in April 2021, said, “Our strong 2021 performance demonstrated the resilience of OCBC’s banking, wealth management and insurance franchise. Supported by our solid balance sheet, diversified funding base, and continued investment in people and technology, we are back to pre-pandemic profitability levels. We achieved good momentum across our customer franchise and reported record wealth management and fee-based income, broad-based loan and insurance sales growth”.

For the fiscal year ended 31 December 2021, UOB reported a net profit of SGD 4.07 billion ($3 billion). The bank achieved solid success across client categories and geographies for the year, thanks to a better operational environment and substantial increase in business activity and consumer spending. UOB led the banks in terms of loan growth, with a 10% increase. On the back of solid income growth and careful spending in 2021, net interest margin remained unchanged at 1.56%, while cost-to-income ratio improved to 44.1% from 45.6% in 2020. Total customer deposits surged by 9% YoY, while the CASA deposit ratio increased by 2.7%. The asset quality remained consistent. Total allowance fell 58% to SGD 657 million ($485 million) as pre-emptive general allowance remained appropriate, and total credit costs on loans fell from 57 basis points to 20 basis points.

Wee Ee Cheong, deputy chairman and CEO of UOB, said, “As we enter the third year of the global pandemic, the overall operating environment has stabilised. We achieved a healthy 40% increase in net profit in 2021 as economic growth, business activities and consumer sentiment picked up”.

According to Moody’s, “The three banks maintained strong funding and liquidity metrics in 2021. Their loan-to-deposit ratios (LDRs) will rise moderately in 2022 because loans will grow at a faster pace than deposits while their liquidity metrics will remain at high levels”.

Profitability of the three banks is expected to grow in 2022

Singapore's interest rates have generally risen and is likely to have additional rate hikes in 2022. As interest rates rise and asset quality remains constant amid better economic conditions, profitability of the three banks will improve even further in 2022. The lifting of COVID-19 restrictions and recovery in 2022, as well as banks evaluating their dividend payout ratio and paying greater dividends, all contribute to the sector's favourable outlook.

Wong shared, “Looking ahead, we are cautiously optimistic that the operating environment will improve. We will work towards executing our long-term goals and refining our strategic priorities to capture the opportunities arising from Asia’s growth and COVID-19-driven acceleration of economic, social and structural trends. We continue to stay focused on growing OCBC’s leading position in our key markets and making further investments to deepen our network, accelerate digital transformation, and develop talent to deliver long term sustainable growth”.

Wee is also very optimistic and added, “We believe the worst is behind us. In Singapore, there are signs of market recovery where we see strong institutional loan growth and a rebound in card spending and wealth management activities. We see significant upside in Southeast Asia, although the pace of recovery may vary by country. Our confidence in the region is underscored by our continued efforts to deepen our customer franchise and to build scale, through organic growth and acquisition”.

The only risk in Singapore’s banking industry is an escalation of tension and a trade war between the US and China, as well as the ongoing war between Russia and Ukraine, where the US and its western allies have imposed sanctions on Russian banks. According to Singapore’s Ministry of Foreign Affairs (MFA), “Singapore will impose financial measures targeted at designated Russian banks, entities and activities in Russia, as well as fund-raising activities benefiting the Russian government”.

Each of the banks faced challenges that may lead to downside performance in 2022

DBS' disruption of online banking in November 2021 was a major concern for both the bank and its customers. DBS has been given an additional capital requirement of SGD 930 million ($692 million) by the Monetary Authority of Singapore (MAS). Because of the additional capital charge incurred, capital levels have an impact on dividend policy and business selection. The issue is how long it will take for MAS to erase the charges, which could damage the bank’s profitability in 2022. DBS is also very dependent on its home market Singapore that is why it is growing its franchise and acquiring shares in Lakshmi Vilas Bank, Shenzhen Rural Commercial Bank and Citibank’s Taiwan consumer banking franchise. However, the acquisitions are projected to contribute to the bank’s revenue not until 2024.

Gupta shared, “Our hiring or investment plans are not affected by the capital surcharge. In terms of how long it will take to have the charge removed, it is MAS’ prerogative. It will be out of place for us to speculate. I do think some observations are appropriate. A large part of what we need to do, which is to focus on incident management and recovery processes, are underway”.

Following a phishing scam that harmed hundreds of OCBC clients, the MAS is exploring regulatory action against the bank. In the past two months alone, about 790 customers of OCBC Bank lost SGD 13.7 million ($10.18 million), up from the SGD 8.5 million ($6.23 million) reported in December 2021, in a series of short message service (SMS) phishing scams. OCBC already made the goodwill payments to affected customers. It is unclear how quickly the bank will recover from this problem, as the MAS has yet to enforce regulatory sanctions or even reverse the scam's present decline in consumer recommendations. It may also have a substantial impact on public view of the bank, and the scam could cause more damage to OCBC in 2022.

UOB acquired Citigroup’s consumer banking businesses comprising its unsecured and secured lending portfolios, wealth management and retail deposit in Indonesia, Malaysia, Thailand and Vietnam. Although UOB Group has international revenue streams, its investors could expect increased expenses in the future as a result of the company's acquisition of Citigroup's consumer banking operations. It will be funded with excess capital and is expected to lower UOB's CET1 ratio by 70 basis points to 12.8%, compared to 13.5% as of September 30, 2021.

Wee said, “Including one-time cost, we will be EPS-and-ROE-accretive by 2023 and generate higher returns over time of ROE of more than 13% by 2026. Our CET1 will be restored to above 13% by 2023”. The downside is the credit cost and what will be the outcome of CET1 in 2022.

Overall, the three banks are likely to maintain profitability in 2022-2023, despite higher interest rates resulting from tighter monetary circumstances, allowing them to continue to expand their margins. Credit costs will continue to be low as asset quality improves, and Singapore's business outlook will revert to pre-pandemic levels.