Global Financials: Attractive Dividend Yields in Asian Banks
Net Interest Margins near peak for US, Hong Kong, and Singapore banks with Fed cuts on the table in 2H24; China banks continue to experience pressure from rates. Having delivered 525 bps of hikes this...
Chief Investment Office - Hong Kong18 Oct 2023
  • Net Interest Margins (NIMs) peaking for US, Hong Kong, and Singapore banks; China banks continue to experience pressure from rates
  • Competition for deposits fading from the peak in 1H23 as loan demand eases amid macroeconomic uncertainties
  • While asset quality remains benign, there are pockets of stress across China and US commercial real estate exposure as NPL ratios tick up
  • Broad-based concerns over high debt levels amongst Chinese property developers remain
  • In US, downside risks to asset quality to be partially offset by proactive provisioning during the pandemic; Asian banks emerge as attractive dividend plays with undemanding valuations
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Net Interest Margins near peak for US, Hong Kong, and Singapore banks with Fed cuts on the table in 2H24; China banks continue to experience pressure from rates. Having delivered 525 bps of hikes this cycle (taking the terminal rate to 5.50%), DBS believes that the Fed will go on a prolonged hold, followed by four rate cuts in 2H24F. As such, net interest margins (NIMs) are expected to be near its peak in the current cycle across US, Hong Kong, and Singapore banks.

Competition for deposits started to fade slightly from the peak in 1H23 as loan demand eases amid macroeconomic uncertainties. Should deposit costs decline sharper than expected, NIMs could potentially peak further out into 1H24F. On the other hand, China banks are faced with further NIM pressure ahead, though less than what we saw in 1Q23. We expect further NIM decline for China banks in 2H23F, driven by 1) LPR cut in the earlier months of the year to impact newly issued loan yield; 2) On the deposit side, though RMB deposit rate is declining, foreign currency deposit rate remains high and time deposit migration trend continues; 3) LGFV restructuring and existing mortgage rate cut to have some impact in 2H23, but the majority of the negative effects will be felt in FY24F.

Asset quality remains benign; Keep an eye on commercial real estate exposure. While asset quality among global banks remains benign, there are pockets of stress across China and US commercial real estate (CRE) exposure as NPL ratios tick up. Higher vacancies continue to weigh on underlying valuations and the repayment of CRE loans, compelling banks to proactively write provisioning in anticipation of potential deterioration in asset quality.

In China, broad-based concerns over high debt levels amongst property developers remain. DBS believes that all state-owned enterprise developers should have sufficient free cash and presales to cover short-term bonds and operating expenses for the next 12 months without refinancing. China and Hong Kong banks remain cautious on China’s CRE.

In the US, new credit card and auto loan delinquencies have surpassed pre-Covid 19 levels since August 2023 as higher interest rates weigh on repayment abilities. Downside risks to asset quality include sharper than expected economic slowdown and persistently high inflation, which will in turn, be partially offset by proactive provisioning across banks during the pandemic.

Asian Banks: Attractive dividend plays with undemanding valuations. China, Hong Kong, and Singapore banks are emerging as attractive dividend yield plays with forward dividend yields ranging 6-10%. Valuations are largely undemanding for China, Hong Kong, and Singapore banks. This is particularly so for China banks which are trading at c.0.3x forward P/BV. We believe that the risk-reward is favorable as prevailing valuations have sufficiently priced-in downside risks emanating from the economic and asset quality front.

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