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Shares of Singapore's Top Banks Jump Ahead of Third-Quarter Earnings

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  • OCBC and UOB are scheduled to kick off third-quarter earnings season for Singapore-listed banks on Wednesday, while DBS is expected to report on Friday.
  • Share prices of all the banks jumped in the lead-up to earnings as markets started pricing in more interest rate hikes than what the U.S. Federal Reserve has indicated.
  • In addition to earnings, the Singapore banks' exposure to Greater China would also come under the spotlight following the financial troubles at Chinese property developer Evergrande.

SINGAPORE — Shares of Singapore's top banks jumped in the lead-up to their third-quarter earnings this week as the global economic recovery gains momentum.

OCBC and UOB are scheduled to kick off third-quarter earnings season for Singapore-listed banks on Wednesday, while DBS is expected to report on Friday.

DBS Group Holdings, the largest of the three Singapore-listed banks, hit a fresh 52-week high on Thursday. The stock has climbed 25.9% this year as of Friday.

The other two banks, Oversea-Chinese Banking Corp and United Overseas Bank, have also inched closer to their 52-week highs. OCBC has gained around 17.3% this year, while UOB has risen 18.4%.

All three banks have beaten the benchmark Straits Times Index, which rose 12.5% so far this year.

Banks have been among the strongest performing sectors in stock markets globally this year, said Geoff Howie, market strategist at the Singapore Exchange.

"Interest rate expectations have been a key driver of international bank stocks in 2021," Howie said in a report in mid-October.

The yield for 10-year U.S. Treasury rose over the last month as markets started pricing in more interest rate hikes than what the Federal Reserve has indicated. It comes as a recovery in the U.S. economy and disruptions to global supply chains push up inflation.  

Higher interest rates are generally good for the profit margins of banks. Rising rates also tend to point to a strengthening economy, which may mean fewer loan defaults.

Singapore's central bank manages monetary policy through setting the exchange rate — instead of interest rate. As a result, domestic interest rates are influenced by global rates.

Earnings preview

The three Singapore banks have reported improved earnings in the last few quarters as the global economy recovers from the Covid-19 pandemic. Analysts said the momentum will likely continue.

Here's what analysts are expecting from the banks' third-quarter report cards, according to estimates compiled by Refinitiv as of Monday:

"As in the previous quarter, we expect all banks to report robust earnings growth (YoY) on lower credit costs," said David Lum, an analyst with brokerage Daiwa Capital Markets.

Credit costs refer to the amount of reserves that banks set aside in anticipation of loan losses.

Like many banks globally, the Singapore lenders made those provisions last year when Covid weighed down economic activity — but the banks started winding down the provisions this year as the global economy bounced back.  

Lum said in an October report that wealth management could do well for the Singapore banks, but trading and market-related income might come under pressure in the third quarter.

Greater China exposure

In addition to earnings, the exposure to Greater China for Singapore banks would also come under the spotlight following the financial troubles at Chinese property developer Evergrande.

A slowdown in Chinese real estate has hurt China's economy, with growth coming in at a disappointing 4.9% in the third quarter compared to a year ago.

Greater China accounted for 30% of DBS loans in the first half of 2021, according to Krishna Guha, equity analyst at investment bank Jefferies. The figure for OCBC and UOB stood at 25% and 16%, respectively, he said in a September report.

Slightly more than half of those Greater China loans was from Hong Kong, said Guha.

All three banks have sufficient buffer to withstand potential stresses in their Greater China portfolio, the analyst said. But lingering uncertainty could still hurt sentiment and future growth prospects, he added.

For now, dividend yield and reasonable valuation would support Singapore bank stocks, said Guha.

Jefferies has maintained its "buy" rating for all three banks.

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