Singapore Banks - Maybank Kim Eng 2017-04-03: Loan improvement in Feb; key is sustainability in FI loans

Singapore Banks Outlook DBS GROUP HOLDINGS LTD D05.SI OVERSEA-CHINESE BANKING CORP O39.SI UNITED OVERSEAS BANK LTD U11.SI

Singapore Banks - Loan improvement in Feb; key is sustainability in FI loans

System loans grew 3.5% YoY in Feb (Jan +1%), partly due to:
1. low-base effect as 2016 saw contraction in credit growth;
2. recovery in the macroeconomic environment; and
3. remarkable growth in lending to financial institutions (FI).

We estimate the multiplier between system loans growth and Singapore GDP growth is 2x, on average.
Our loan growth assumption for Singapore banks is 2-4% YoY in FY17, on the basis that banks will make selective lending. We estimate every 1% increase in loan growth could potentially raise net interest income by c.1%, ceteris paribus.
Maintain NEUTRAL.

Corporate loans gathered momentum in Feb, increasing 4.5% YoY (Jan +1.4%), a level not seen since Aug’15. The improvement in lending was mainly led by Building & Construction (B&C) +5.2%, General Commerce (GC) +3.9% and Financial Institutions (FI) +12.3%.
Rebound in GC loan growth and a slower pace of contraction in manufacturing loans were consistent with strong non-oil domestic exports and industrial production data YTD.
While corporate demand could be recovering, it is important to look for sustainability of FI loan growth as FI lending forms c.19% of system loans. The strong FI loan growth is positively correlated to the performance of the FSSTI Index, especially in recent years. We think this could be partly attributed to lending to investment holding companies for margin financing purpose. FI growth may not be sustained if equity market performance turns lacklustre.
On the other hand, consumer loans rebounded from Jan’s weak reading of -0.1% YoY, at +0.8%. However, this still reflects weak consumer sentiment and headwinds in the domestic property market.

System deposits grew +5% YoY (Jan +4.6%), with Domestic Banking Unit (DBU) and Asian Currency Unit (ACU) deposits up 6.6% and +3.3%, respectively (ACU growth in SGD terms). DBU deposits gained strong momentum from CASA deposits, which grew strongly at c.10%, as banks in Singapore compete for sticky CASA deposits by offering attractive rates.
As loan demand rose, system LDR has tightened to 100.4% (Jan +99.4%), a level not seen in a year.

Maintain NEUTRAL on Singapore banks.
We have a relative preference for DBS as we are positive on its ability to drive pre-provision profits (see Silver Lining, 27 Feb 2017).
Risks to our call are:
1. NIM improvement from higher rates;
2. higher non-interest income; and
3. benign credit costs.

Ng Li Hiang Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2017-04-03

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