Singapore banks' net profit may have declined 9% in 4Q12

Decreasing NIM is the culprit.

According to DBS, the Singapore banks will report 4Q12/FY12 results from next week. DBS estimates core net profit to decline 9% q-o-q as NIM continues to slide. Loan growth could see a slight uptick in 4Q12 bringing full year loan growth close to 10%. 

Here's more from DBS:

Provisions will likely remain low while asset quality stays robust. Lower effective tax rates are a usual trend in 4Q. Despite expectations of a q-o-q decline in 4Q12 net profit, full year 2012 earnings are estimated to grow at a strong 18%, driven by non-interest income and low provisions.

OCBC’s bumper year. Consensus FY12 forecasts may be distorted due to one-off gains of S$1.13bn from the sale of FNN/APB shares in 3Q12. Excluding one- off gains, we expect OCBC to report strong FY12 earnings (+24% y-o-y) as insurance income should rebound in 2H.

Softer 2013; non-interest income would be the key driver. With NIM and loan growth cast aside as drivers, banks have to differentiate and work extra hard to boost non-interest income. The good news is non-interest income activities utilise less capital.

Although banks are all striving to extract the extra mile in transaction banking and cash management, we believe the key differentiators would be treasury and wealth management. We project that earnings will grow by only 2% in 2013 having imputed higher provision charge-off rates (+5bps y-o-y) in our forecasts and lower NIM (-2bps y-o-y).

We expect loans to grow at 8% in 2013. Despite softer earnings momentum, Singapore banks’ balance sheets are strong. We see minimal risk to asset quality while capital will remain strong even with Basel III.

Upside risk to our forecasts. Based on our estimates, every 5bps decline in charge-off rates would lift earnings by 2.4%. In addition, every 1ppt increase in loan growth would add 0.8% to earnings. Every 1% increase in non-interest income would raise earnings by 0.8%. With such positive swings, our 2013 earnings growth could inch to 6%.

Stick with OCBC (over UOB). OCBC remains a BUY and our preferred pick as we believe opportunities for cross-selling and hence fee income enhancement is greater from its Bank of Singapore and Great Eastern platforms. UOB remains a HOLD.