Singapore banks must brace for flat underlying earnings growth in 2013

Mild uptick in credit costs offsets single-digit revenue growth, says Barclays.

Barclays believes the key focus will be management guidance on strategy, margin and loan growth outlook (especially on corporate and housing loans) for 2013. In 4Q, the analyst expect margins to fall further (-2bps q/q) and for housing and Indonesia/Thailand corporate lending to again be the key growth drivers. 

Here's more from Barclays:

UOB (OW) remains our preferred pick with the most diverse ASEAN exposure, while DBS (UW) is our least preferred due to its large China/HK exposure and lack of dividend upside potential.

4Q12 underlying profit down by 2% q/q: We forecast the combined underlying profit for the three Singapore banks to rise 16% y/y in FY12E but decline sequentially by 2% q/q in 4Q12E (some 4Q seasonal weakness and continued margin pressure, -2bps q/q). We tweak our full year FY12-14E profit estimates up by 0-4%, reflecting slightly better returns on investment securities and lower credit costs, offsetting the impact from slower mortgage growth. 

We cut our mortgage growth estimate to 5% in FY13E and 0% in FY14E (from 10% previously). Results will be announced on 6 Feb for DBS, 15 Feb for OCBC and 27 Feb for UOB.

Expect falling dividend payout for DBS: The Singapore banks are among the best capitalized in the region with core Tier 1 ratios in excess of 11%+ on a fully loaded Basel III basis, on our estimates. We expect no change to the dividend payout ratio of 40% for UOB and 45% for OCBC.

However, we forecast DBS to maintain 56c full year DPS between FY12 and FY14E (i.e. declare 28c final dividend in 4Q12), implying the dividend payout ratio falls to 35% in FY12E (from 45% in FY11), in order to conserve capital in preparation for the acquisition of Danamon (which is still pending regulatory approval).

2013 outlook – lack of sector positive catalysts: Looking into FY13, we forecast largely flat underlying earnings growth as a mild uptick in credit costs offsets single-digit revenue growth. The increasing importance of capital, liquidity and deposit funding will place pressure on profit growth, in our view.

Moreover, loan demand is slowing – both corporate and mortgage, domestic and overseas. In FY13E, we expect margins to continue to trend lower by 6bps y/y and for Singapore system loans to grow by 8% y/y (down from 10% in FY12E).

Top pick UOB: We most prefer UOB due to its greater exposure to higher growth ASEAN markets. Based on our blended valuation methodology and mild upward earnings revision (up 0-4%), we tweak our PTs slightly for UOB/OCBC/DBS to S$21.90/9.50/13.60 from S$21.10/9.00/13.00, respectively