UOB Kay Hian
Thursday, 17 April 2025
Singapore Banks 1Q25 Preview: Navigating NIM Compression Amid Trade War Concerns
Singapore’s banking sector is bracing for a period of change, with the 1Q25 results season on the horizon. This report delves into the expected performance of DBS Group Holdings (DBS), Oversea-Chinese Banking Corporation (OCBC), and United Overseas Bank (UOB), considering factors like net interest margin (NIM) compression, fee income growth, and potential asset quality deterioration.
1Q25 Results Preview: Calm Before The Storm
The first quarter of 2025 is expected to reveal NIM compression for DBS and OCBC due to a significant drop in the Singapore Overnight Rate Average (SORA). While fee income is projected to grow, driven by wealth management, asset quality concerns loom in the second half of the year. The recommendations are to maintain MARKET WEIGHT, BUY OCBC (Target: S\$16.90), and HOLD DBS (Target: S\$40.00).
Key Dates for Results Releases:
- United Overseas Bank (UOB): May 7, 2025
- DBS Group Holdings (DBS): May 8, 2025
- Oversea-Chinese Banking Corporation (OCBC): May 9, 2025
DBS Group Holdings (DBS SP/HOLD/Target: S\$40.00)
DBS is expected to report a net profit decline of 7% year-on-year (YoY) but a rebound of 9% quarter-on-quarter (QoQ) to S\$2,746 million in 1Q25. NIM compression is anticipated due to the strong Singapore Dollar impacting overseas growth and interest rate cuts by the Federal Reserve (Fed).
- Net Interest Margin (NIM): Expected to compress by 6 basis points (bp) QoQ to 2.09% in 1Q25.
- Net Interest Income: Projected to grow by 6.0% YoY in 1Q25 (4Q24: +8.6% YoY).
- Loan Growth: Expected to be flattish YoY in 1Q25.
- Fees: Increased at a low double-digit rate of 10% YoY.
- Wealth management contribution is expected to increase 17% yoy and 20% qoq to S\$625m in 1Q25
- Cards increased 10% yoy to S\$331m
- Loans-related fees also recovered 18% qoq
- Operating Expenses: Forecasted to increase by 13% YoY, with the cost-to-income ratio normalizing to 41.3% in 1Q25.
- Asset Quality: NPL formation is expected to remain benign, with the NPL ratio stable at 1.1%.
- Provisions: Total provisions are expected to be S\$208 million, with a credit cost of 19bp in 1Q25.
- Dividends: DBS is expected to maintain a quarterly dividend of 60 S cents, including a Capital Return Dividend (CRD) of 15 S cents for 1Q25.
Oversea-Chinese Banking Corporation (OCBC SP/BUY/Target: S\$16.90)
OCBC is forecasted to experience a 5% YoY decline in net profit but an 11% QoQ rebound to S\$1,874 million for 1Q25. A steeper NIM compression is anticipated due to a significant drop in the three-month compounded SORA.
- Net Interest Margin (NIM): Expected to ease 19bp YoY and 7bp QoQ to 2.08% in 1Q25.
- Loan Growth: Projected to expand by 6.3% YoY but remain muted at 0.2% QoQ in 1Q25.
- Net Interest Income: Could decline by 0.4% YoY in 1Q25 (4Q24: flat YoY).
- Fee Income: Expected to grow 9% YoY to S\$523 million in 1Q25, with wealth management showing steady growth of 12% YoY.
- Insurance: Contribution from the insurance business is expected to be at a normalized level of S\$270 million in 1Q25.
- Asset Quality: NPL ratio is expected to be stable at 0.9%.
- Provisions: Total provisions are factored in at S\$176 million, with credit costs of 22bp in 1Q25.
Market Weight: Maintained
Top Buys
| Company |
Rec |
Share Price (S\$) |
Target Price (S\$) |
| DBS |
HOLD |
40.10 |
40.00 |
| OCBC |
BUY |
15.67 |
16.90 |
Valuation Metrics
P/B – DBS: Average: 1.36x
P/B – OCBC: Average: 1.48x
Peer Comparison
| Company |
Ticker |
Rec |
Price |
Target |
Market Cap |
FY |
PE 2025F |
PE 2026F |
P/B 2025F |
P/B 2026F |
P/PPOP 2025F |
P/PPOP 2026F |
Yield 2025F |
Yield 2026F |
ROE 2025F |
ROE 2026F |
|
|
|
(S\$) |
(S\$) |
(US\$m) |
|
(x) |
(x) |
(x) |
(x) |
(x) |
(x) |
(%) |
(%) |
(%) |
(%) |
| DBS* |
DBS SP |
HOLD |
40.10 |
40.00 |
86,665 |
12/2024 |
11.5 |
12.1 |
1.69 |
1.68 |
8.8 |
8.9 |
7.5 |
7.5 |
14.3 |
13.4 |
| OCBC |
OCBC SP |
BUY |
15.67 |
16.90 |
53,647 |
12/2024 |
10.2 |
10.4 |
1.18 |
1.14 |
8.3 |
8.2 |
6.4 |
5.4 |
11.6 |
10.9 |
| UOB# |
UOB SP |
NR |
34.13 |
n.a. |
43,420 |
12/2024 |
9.0 |
8.6 |
1.14 |
1.07 |
6.7 |
6.5 |
6.5 |
6.1 |
12.9 |
12.9 |
| Average |
|
|
|
|
|
|
10.2 |
10.4 |
1.33 |
1.29 |
7.9 |
7.9 |
6.8 |
6.3 |
12.9 |
12.4 |
*12/2024
# Based on consensus estimate
Trade War Impact and Singapore’s Response
The ongoing trade war, characterized by reciprocal tariffs introduced by the US, is expected to significantly impact global trade. This situation could lead to weaker consumption in the US due to higher import prices and stall China’s export growth. ASEAN countries, including Singapore, are likely to be negatively affected by reduced external demand.
- Singapore is particularly vulnerable, with final demand from the US accounting for 8.3% of its domestic value-add.
- The government is prepared to provide additional support for households and businesses if the economic situation deteriorates.
- Targeted measures are expected to bolster resilience and navigate the shifting economic landscape.
GDP Growth Revision
The Ministry of Trade & Industry has revised Singapore’s GDP forecast downward from 1.0-3.0% to 0.0-2.0%, reflecting global uncertainties and weakened external demand.
Investment Strategy: Focus on Dividend Yields
Banks offer attractive value with low price-to-book (P/B) ratios and high dividend yields. OCBC is favored for its defensively low P/B ratio, while DBS is recognized for its emphasis on capital management.
- OCBC (BUY/Target: S\$16.90) for its defensively low 2025F P/B of 1.18x.
- DBS (HOLD/Target: S\$40.00) for its focus and emphasis on capital management.
DBS Group Holdings (HOLD/Target: S\$40.00) – 2025 Guidance
DBS’s management has provided guidance for 2025, expecting net interest income to be slightly above 2024 levels. The negative impact from NIM compression is expected to be offset by positive loan growth.
- Net Interest Margin (NIM): Expected to be around 2.10% (2024: 2.13%).
- Non-Interest Income: Projected to grow at a high single-digit rate, driven by wealth management and treasury customer sales.
- Cost-to-Income Ratio (CIR): Expected to be in the low-40% range.
- Specific Provisions: Expected to be 17-20bp.
- Pre-Tax Profit: Should be flat at around 2024 levels.
- Net Profit: Expected to be lower than 2024 levels due to the global minimum tax rate of 15%.
Capital Management at DBS
DBS has introduced a Capital Return Dividend (CRD) of 15 S cents per quarter for 2025 and expects to pay out similar amounts in 2026 and 2027. Additionally, a new share buyback program of S\$3 billion has been established.
DBS Valuation
The target price for DBS of S\$40.00 is based on 1.68x 2025F P/B, derived from the Gordon Growth Model (ROE: 14.7%, COE: 8.75%, growth: 0.0%).
Profit & Loss Forecast for DBS (1Q25)
| Profit & Loss (S\$m) |
1Q25F |
1Q24 |
yoy % Chg |
4Q24 |
qoq % Chg |
| Net Interest Income |
3,714 |
3,505 |
6.0 |
3,728 |
-0.4 |
| Fees & Commissions |
1,148 |
1,043 |
10.1 |
968 |
18.6 |
| Other Non-interest Income |
875 |
1,009 |
-13.3 |
809 |
8.2 |
| Total Income |
5,737 |
5,557 |
3.2 |
5,505 |
4.2 |
| Operating Expenses |
(2,369) |
(2,090) |
13.3 |
(2,501) |
-5.3 |
| PPoP |
3,368 |
3,467 |
-2.9 |
3,004 |
12.1 |
| Provisions |
(208) |
(135) |
54.0 |
(209) |
-0.6 |
| Associates |
70 |
51 |
37.3 |
70 |
0.0 |
| PBT |
3,230 |
3,383 |
-4.5 |
2,865 |
12.7 |
| Net Profit |
2,746 |
2,951 |
-7.0 |
2,522 |
8.9 |
| EPS (S cents) |
96.7 |
103.8 |
-6.8 |
90.0 |
7.5 |
| DPS (S cents) |
75.0 |
54.0 |
38.9 |
60.0 |
25.0 |
| BVPS (S\$) |
24.26 |
21.55 |
12.6 |
23.38 |
3.8 |
Profit & Loss Forecast for OCBC (1Q25)
| Profit & Loss (S\$m) |
1Q25F |
1Q24 |
yoy % Chg |
4Q24 |
qoq % Chg |
| Net Interest Income |
2,427 |
2,437 |
-0.4 |
2,455 |
-1.1 |
| Fees & Commissions |
523 |
479 |
9.2 |
517 |
1.2 |
| Insurance |
270 |
289 |
-6.6 |
101 |
167.3 |
| Net Trading Income |
350 |
370 |
-5.4 |
303 |
15.5 |
| Other Non-Interest Income |
60 |
51 |
17.6 |
40 |
50.0 |
| Total Income |
3,630 |
3,626 |
0.1 |
3,416 |
6.3 |
| Operating Expenses |
(1,476) |
(1,369) |
7.8 |
(1,584) |
-6.8 |
| PPOP |
2,154 |
2,257 |
-4.6 |
1,832 |
17.6 |
| Provisions |
(176) |
(169) |
4.1 |
(208) |
-15.4 |
| Associates |
268 |
255 |
5.0 |
245 |
9.3 |
| PBT |
2,246 |
2,343 |
-4.1 |
1,869 |
20.2 |
| Net Profit |
1,874 |
1,982 |
-5.4 |
1,687 |
11.1 |
| EPS (S cents) |
41.4 |
44.0 |
-6.0 |
37.0 |
11.8 |
| DPS (S cents) |
0.0 |
0.0 |
n.m. |
57.0 |
n.m. |
| BVPS (S\$) |
13.21 |
12.27 |
7.7 |
12.80 |
3.2 |
Policy Interest Rates
US FED Funds Rate VS 3M SIBOR and 3M SORA
Oversea-Chinese Banking Corp (BUY/Target: S\$16.90) – 2025 Guidance
OCBC’s management anticipates mid-single-digit loan growth, a cost-to-income ratio in the low 40s, and credit costs between 20-25bp for 2025. NIM is expected to narrow due to the lagged impact of Fed Funds Rate cuts.
Capital Management at OCBC
OCBC has announced a plan to return S\$2.5 billion of excess capital to shareholders over two years through special dividends and share buybacks.
OCBC Valuation
The target price of S\$16.90 is based on 1.27x 2025F P/B, derived from the Gordon Growth Model (ROE: 11.1%, COE: 8.75%, growth: 0.0%).
Projected DPS and Dividend Payout Ratios
|
DBS |
OCBC |
UOB# |
| Price (S\$) |
40.10 |
15.67 |
34.13 |
| Year to 31 Dec |
FY24 |
FY25F |
FY26F |
FY24 |
FY25F |
FY26F |
FY24 |
FY25F |
FY26F |
| EPS (S ¢) |
394 |
350 |
332 |
167 |
154 |
151 |
356 |
378 |
398 |
| DPS (S ¢) |
222 |
300 |
300 |
101 |
100 |
84 |
205 |
228 |
217 |
| Payout Ratio (%) |
56.3 |
85.7 |
90.4 |
60.5 |
65.0 |
55.8 |
57.6 |
60.4 |
54.5 |
| Dividend Yield (%) |
5.5 |
7.5 |
7.5 |
6.4 |
6.4 |
5.4 |
6.0 |
6.7 |
6.4 |
# Based on consensus estimate.
Assumption Changes
- Earnings forecasts for DBS and OCBC are maintained.
Key Assumptions – DBS
|
2023 |
2024 |
2025F |
2026F |
2027F |
| Loan Growth (%) |
0.4 |
3.4 |
1.7 |
2.0 |
4.3 |
| NIM (%) |
2.15 |
2.14 |
2.04 |
1.99 |
1.99 |
| Fees, % Chg |
9.5 |
23.2 |
11.7 |
8.3 |
8.3 |
| NPL Ratio (%) |
1.11 |
1.09 |
1.23 |
1.33 |
1.36 |
| Credit Costs (bp) |
13.7 |
14.0 |
35.1 |
47.1 |
19.1 |
| Net Profit (S\$m) |
10,062 |
11,289 |
10,160 |
9,689 |
11,387 |
| % Chg |
22.8 |
12.2 |
(10.0) |
(4.6) |
17.5 |
Key Assumptions – OCBC
|
2023 |
2024 |
2025F |
2026F |
2027F |
| Loan Growth (%) |
0.4 |
7.6 |
1.6 |
1.8 |
4.2 |
| NIM (%) |
2.28 |
2.20 |
2.04 |
2.03 |
2.04 |
| Fees, % Chg |
(2.5) |
9.2 |
10.7 |
7.4 |
7.4 |
| NPL Ratio (%) |
0.95 |
0.89 |
1.07 |
1.22 |
1.22 |
| Credit Costs (bp) |
24.8 |
22.4 |
35.8 |
47.1 |
24.5 |
| Net Profit (S\$m) |
7,021 |
7,587 |
6,931 |
6,818 |
7,762 |
| % Chg |
22.2 |
8.1 |
(8.6) |
(1.6) |
13.8 |
Sector Catalysts
- Slowdown in trade globally and regionally, leading to a decline in loan growth.
- Slowdown and job losses in the manufacturing sector within ASEAN countries, which are likely to spill over into a contraction in domestic consumption. Asset quality could start to deteriorate.
Risks
- Escalation of trade conflicts between the US, EU, and China.
- Geopolitical tensions between the US, EU, and China.
Analyst(s): Jonathan Koh, CFA, MSc Econ
+65 6590 6620
jonathankoh@uobkayhian.com
