Muted loans and flat fee growth to hit OCBC, DBS' s Q4 net profits

Residential mortgage growth is sluggish whilst credit costs remained elevated.

Singapore banking giants DBS and OCBC are expected to report a drop in net profits for the final quarter period of 2020 amidst muted loan growth and flat fee growth, according to a report by UOB Kay Hian.

The country&rsquo s big three banks are set to release their Q4 and full-year results in February. DBS will release its Q4 2020 results on 10 February before the Chinese New Year, whilst OCBC and UOB are scheduled on 24 February and 25 February, respectively.

DBS is forecasted to report a net profit of $1.002b for Q4, 33.5% YoY lower than in Q4 2019, and 22.7% lower compared to Q3 2020. This is on the back of its muted loan growth, expected to come in at a 3.3% YoY growth and a 0.8% QoQ growth.

The bank&rsquo s non-trade corporate loans and residential mortgages were notedly sluggish during the quarter, said UOB Kay Hian analyst Jonathan Koh.

On the other hand, the bank&rsquo s wealth management fees will likely expand 40% YoY on the back of increased customer activities, thanks to improved market sentiment as well as risk-on appetite to invest on recovery fees.

However, overall total fees and commissions will be flat from Q3 but increase 8.5% compared to Q4 2019. Contributions from cards will drop 18% YoY due to lack of outbound travel, whilst fees from transaction services will drop 8% YoY.

Koh also said that DBS&rsquo s credit costs will likely remain elevated, as the bank is expected to recognise its $160m exposure to Shenyang-based Huachen Automotive Group as a non-performing loan (NPL). NPL ratio will then deteriorate slightly to 1.7%.

Meanwhile, OCBC saw steady contributions from core businesses as well as lower credit costs. Its net profit for the quarter is forecasted to be $882m, a 29.1% YoY drop from Q4 2019 and a 14.3% QoQ decline from Q3 2020.

Similar to DBS, OCBC&rsquo s loan growth is expected to be muted during the quarter due to a slowdown in corporate loans and residential mortgages. Loan growth is likely to come at a 1.8% YoY growth and a 0.3% QoQ expansion, according to Koh.

The bank&rsquo s net interest margin (NIM) has bottomed out and will remain stable from Q3, at a 1.54% growth, with active management on costs of deposits. Total fees and commissions for the quarter will also be flat at QoQ, but fall 9.4% YoY compared to Q4 2019.

OCBC&rsquo s wealth management fees have also stabilised during the quarter following a 22% surge in Q3. Loans and trade-related fees will be softer.

The bank is also expected to report healthy growth of new sales from its insurance arm, with a possible contribution of $230m from its insurance business.

Both banks are expected to benefit from the upcoming vaccinations, which will improve business confidence, ease safe distancing measures, and reduce stress on the corporate sector, moderating NPL formation, Koh said.

&ldquo Banks, being cyclical stocks, will benefit from an economic recovery as consumer behaviour and domestic consumption normalise when vaccination commences,&rdquo he added.

OCBC and DBS will also benefit from lower credit costs in 2021. DBS&rsquo s 2020 provisions is estimated at $3.1b, eventually dropping $1.6b in 2021.  Meanwhile, OCBC&rsquo s provisions are estimated to come at $2.1b for 2020, and then drop to $0.9b in 2021.