Singapore banks' 1Q 2021 results reflect improving economic conditions

• Net profit of OCBC grew 115% year-on-year, followed by DBS at 72% and UOB at 18%
• DBS’ net interest margin continues to decline, while UOB and OCBC’s NIM started to recover since the third quarter of 2020
• The three major banks are set to bid for some retail assets of Citigroup

DBS, OCBC and UOB opened the year with significant growth in their net profit, return on equity, and core capital ratio according to the banks’ respective financial performance report. The growth is due to improving business confidence and renewed market optimism.

Net profit of OCBC saw 115% YoY growth, DBS at 72% and UOB at 18%

Among the three commercial banks, OCBC posted a significant increase in total income amounting to $2.2 billion in the first quarter (Q1) of 2021 or a 17% year-on-year (YoY) growth compared to $1.87 billion in the same period in 2020.

Helen Wong, CEO at OCBC, said, “While we remain watchful of the prevailing risks in the operating environment, our strong balance sheet and capital position will enable us to capitalise on opportunities arising from improved economic conditions particularly in Southeast Asia and Greater China”.

“Earnings were up in our core markets and the momentum across our businesses is building up from renewed market optimism,” Wong added.

UOB posted a total income of $1.87 billion, up 3% YoY compared to $1.81 billion in Q1 2020. DBS’ total income dropped 4% to $2.9 billion from $3.28 billion in same period in 2020.

Wee Ee Cheong, CEO at UOB, said, “UOB has achieved a strong start to 2021. Our core businesses are growing well across our diversified franchise and we are seeing quality growth with record fee income”.

DBS’ total income dipped during the first quarter of the year due to lower net interest margin (NIM). It would have been up 9% if the NIM is stable. Piyush Gupta, CEO at DBS, explained, “The portfolio quality is improving and not deteriorating. In the first quarter, I saw more upgrades than downgrades frankly overall”.

OCBC was the top performer among its peers as its net profit rose 115% to $1.13 billion. DBS’ net profit went up 72% to $1.5 billion.  UOB was the least performer among the three with an 18% increase in net profit to $759 million.

Non-performing loan (NPL) ratio of the three banks was at a similar level at 1.5%. However, the NPL ratios of UOB and DBS have slightly declined at end of March while OCBC remained stable.

NPL ratio compares the amount of loan which the consumers are unable to settle off the interest or the principal amount to the total loan book. Loan-loss provisions were lowered significantly during the first quarter of the year due to upgrades of some borrowers’ credit ratings and more benign economic projections under Singapore Financial Reporting Standards 1092 (SFRS 1092). According to Moodys, it is expected that the overall loan-loss provisions of the banks will continue to decline to pre-pandemic levels of about 30 basis points of gross loans.

DBS’ NIM continues to decline, while UOB and OCBC started to recover since Q3 2020

DBS’ NIM in the first quarter of the year went down to 1.49% while other banks started to recover and stabilise since the third quarter of 2020. OCBC’s NIM increased to 1.56% and UOB at 1.57%. DBS’ NIM declined due to US federal reserve rate cuts in March 2020 and faltering fee income from slowing market activity amid the pandemic.

Wong claimed the strong numbers are due to diversified earnings on the three pillars of their business, namely wealth, insurance, and banking operations. Furthermore, the three banks saw a significant improvement in return on equity (ROE). DBS earned the highest ROE among the three banks with 15.4% compared to the previous year’s 9.1%. OCBC’s ROE stood at 12.4% and UOB at 10.2%.

Moody’s shared that the core capital ratios will remain high. However, there will be moderate declines in the coming months. Supported by lower risk-weighted assets (RWA) growth and retained earnings, OCBC’s Common Equity Tier 1 (CET1) ratio was 15.5%, while DBS’ CET1 ratio increased to 14.3%. Meanwhile, UOB’s CET1 ratio declined to 14.3% due to stronger credit growth. Moody’s predicted that the core capital ratios of the three banks will fall modestly this year due to faster asset growth fuelled by the economic recovery and increase in dividend payments if regulatory restrictions were lifted.

Major banks set to bid for Citi’s retail assets

DBS, OCBC, and UOB are set to bid for portions of Citi’s consumer business in Asia. The move came after Citi announced last month that it would exit from its consumer franchises in 13 markets, 10 of which are in Asia. Citi has refocused on its more lucrative institutional and wealth management business. Citi will exit with $82 billion in total assets and has allocated $7 billion in tangible common equity last year. Furthermore, the consumer banking business in the 13 markets accounted for $4.2 billion of the bank’s $74.3 billion revenue in 2020. All the markets it is exiting made a combined loss of $40 million in the consumer banking business in the same year.

OCBC is weighing bids for some of Citi’s Southeast Asian business. Meanwhile, DBS shared that it has always been open to exploring sensible bolt-on opportunities in markets where it has consumer banking franchises. The bank is also seeing more traction for its crypto assets business following the launch of a full-service Bitcoin exchange in December 2020.

DBS’ Gupta shared, “Our digital exchange capabilities are much like Coinbase but the difference is that Coinbase is mass-market retail while we have been judicious by offering this to accredited investors and institutional counterparties to start with”. To date, DBS reported that its cryptocurrency trading volume sees a significant increase of around $30 million to $40 million.

On the other hand, UOB’s Wee shared that the bank will look at Citigroup’s assets in the markets in which the foreign bank is exiting. “We are always open to acquisition opportunities. As long as it’s a strategic fit, at the right price and makes sense for the long term, we will look at it,” he added.

If the three banks successfully acquire some retail assets of Citigroup, it could have a modest boost on capital ratios for the buyer bank. The three showed resiliency amid the effect of the pandemic with significant income growth during the first quarter of the year.