Singapore Banks - Maybank Kim Eng 2017-06-14: CASA ~ Good Or Bad?

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

Singapore Banks - CASA ~ Good Or Bad?

Scope for managing liability costs 

• In this report, we focus on the ability of Singapore banks to influence their cost of funding. 
• Lending yields may be under pressure from competition/high quality credit but Singapore banks have the ability to manage their liability costs to at least maintain or modestly improve NIMs. Indeed, the negative gaps between customer deposit costs to SIBOR/LIBOR have closed as banks gradually remove promotional pricing.
• We argue that lowering deposit rates should not result in a loss of deposits as CASA deposits are sticker; the banks have successfully cross-sold/bundled services from these accounts. We also observe large foreign banks have ample liquidity and may not need to compete aggressively for funding. 
• Maintain NEUTRAL.

Shift to CASA deposits 

• CASA is now a much larger proportion of deposits for both the Singapore DBU banking system and Singapore banks’ deposit base. 
• In Singapore, CASA deposits cost more than FDs; CASA deposit rates are now higher than FD rates. Banks have paid up to attract current account deposits as such customers are stickier and carry greater potential to bundling/cross-selling other banking products.

Cost of customer deposits > interbank rates 

• SIBOR/LIBOR against the funding cost of Singapore banks for customer deposits gap shows only DBS has a normalized spread (i.e. interbank rates higher than funding cost). In contrast, since 1Q08, OCBC and UOB have experienced negative spreads between SIBOR and customer cost of funds (slight positive spread between 4Q15-1Q16).
• However, it is encouraging to see that the gap has narrowed significantly to 11-16bp in 1Q17 (from 65-71bp in 4Q14). This means banks are already taking steps to improve their liability management.

Maintain NEUTRAL 

• We maintain NEUTRAL rating on Singapore banks. DBS remains our preferred pick due to its ability to manage liability costs to drive PPoP.
• Key risks to our call: 
  1. NIM improvement from higher rates; 
  2. higher non-interest income; and 
  3. benign credit cost.

CASA: Current Account, Savings Account
DBU: Domestic Banking Unit
PPoP: Pre-Provision Operating Profit

1. Assessing the ability of Singapore banks to influence their cost of funds 

• In previous reports (Singapore Banks - Loan improvement in Feb; key is sustainability in FI loans), we reflect our concern that lending spreads for Singapore banks have been stubbornly subdued throughout this credit cycle. 
• Singapore banks’ customer spreads were 1.95-2.14% at 1Q17 against 2.38-3.04% at 1Q10 in the aftermath of the global financial crisis. While we have recently started to see a slight improvement in customer spreads for UOB, we believe Singapore banks still lack the ability to price up their lending yields due to lending to high quality credit and competitive pressures.
• In this paper, instead of focusing on the pricing of assets, we assess the scope for the banks to manage their cost of funding. The conclusion is encouraging because we think Singapore banks have some scope to manage their liability cost.

2. Changes in deposit mix 

2.1 CASA deposits now form a bigger proportion 

• The Singapore DBU banking system has seen a shift from fixed deposits towards CASA deposits. 
• As of 4Q07, the system’s fixed deposits represented 56% of total customer deposits, while savings and demand deposits formed 44%. But at 1Q17, fixed deposits only comprised 38% of total customer deposits, while savings and demand deposits together formed 62%. 
• Likewise, CASA deposits now form a larger proportion of customer deposits for the three local banks as compared to ten years ago. OCBC saw the largest improvement in its CASA mix, from 28% in 1Q07 to 50% of its total deposit base in 1Q17. Similarly, DBS’s/UOB’s CASA mix improved from 46%/30% in 1Q07 to 63%/45% in 1Q17, respectively.

2.2 …but CASA does not mean cheaper cost of funding 

• In most banking systems, CASA are considered sources of low cost funds, especially since banks do not pay interest for funds parked in current accounts. But in Singapore, this has changed. In its zeal to gather current deposits and use such accounts as a means of attracting new customers, Singapore banks have been paying up for current deposits. Such deposits are no longer regarded as a cheap source of funding for Singapore banks.
• The flip side is current account customers tend to be stickier than FD customers. In offering promotional rates for current deposits, Singapore banks encourage customers to bank their salaries into these accounts and then facilitate electronic payments for mortgages, utilities, transportation, credit cards or other regular transfers. All these help to create sticky relationships.
• One of OCBC’s popular savings products in Singapore, the OCBC 360 account, was first launched in July 2013 to reward customers who undertake more online banking with the bank. Its product enhancement in 2014 allowed customers to earn interest rates of up to 3.05% (in comparison to FD rates of 0.25% for local banks at that time). It was the best interest rate in town and also drew young professionals to bank with OCBC. The revised terms and conditions wef from 1 April reflects effort by the bank to cross-sell other products to current account customers; customers who buy/participate in additional products stand to gain higher rates. For instance, customers can gain higher interest rates when they insure or invest with OCBC. Other competitive offerings, such as the DBS Multiplier account and UOB One Account work in similar innovative ways to lure and improve cross-selling.

3. Large foreign banks offer deposit rates that are lower or on-par with local banks 

• The foreign banks with a large Singapore presence (Citibank, Standard Chartered, and HSBC) surprisingly offer fixed deposit rates that are lower or on-par with the local banks.
• Smaller ones (CIMB, Bank of East Asia) have been more aggressive in raising their FD board rates (shaded in green). Their smaller branch networks limit their deposit collecting capability, and accordingly, curtail their loan book as well. Therefore, their deposit rates tend to be priced at a premium to local and large foreign banks.

4. Cost of customer deposits > interbank rates 

• We compare the banks’ group cost of deposits against SIBOR and LIBOR. Note however, the shortcoming of this comparison is that the cost of customer deposits include liabilities from Singapore, as well as from offshore operations, where interest rates (such as from Indonesia or Thailand) are at more elevated levels. But we can still make the following observations: 
  • Only DBS shows a normalized spread, as interbank rates (both SIBOR and LIBOR) are higher than customer cost of funds.  Comparing SIBOR and cost of funds, DBS’s spread has been positive since 2Q15. In contrast, both UOB and OCBC continued to experience negative spreads since 1Q08 (despite slight positive spread between 4Q15-1Q16). It is encouraging to see that the gap for UOB and OCBC has narrowed significantly from 65-71bp in 4Q14 to 11-16bp in 1Q17.
  • Singapore banks have been working to improve liability management. Although interest rates (LIBOR and SIBOR) have crept up, the Singapore banks’ costs of funding have not followed in the same magnitude. Comparing between 1Q15 and 1Q17, SIBOR and LIBOR were both up 29/79 bps, respectively, but DBS’s and OCBC’s funding cost for deposits fell by 10bps, whereas UOB’s cost of funding rose by 4bps.
  • Unsurprisingly, DBS has the lowest cost of funding as compared to peers thanks to its low-cost POSB’s CASA deposit franchise and active liability management.

5. Some scope for liability management 

• Looking ahead, we are optimistic that Singapore banks have some scope to improve their liability management. Closing the negative spread between SIBOR/LIBOR to customer cost of funds in recent months implies that banks are already taking steps to lower their liability cost.
• Despite a limited ability to reprice their loans, the latitude to manage liability cost may give them some breathing room to, at worst, maintain to modestly improve their margins.
  • Rising rates act as an incentive for depositors to park more funds in their deposit accounts. SGD LDR is currently at 80.7% for DBS and 88- 89% for OCBC and UOB. LDR is near the high, but not the highest level. We think the banks can tolerate LDR at 85-90%, with DBS having the highest scope for an increase.
  • A large proportion of CASA deposits imply sticky customer relationships. We think that lowering deposit rates or removing promotional rates will not hurt the pool of customer deposits too badly. We note that banks are no longer running aggressive FD promotional rates as compared to a year ago.
  • Major foreign banks in Singapore (i.e. Citibank, StanChart and HSBC) have SGD LDR at 80-90%. Their USD LDR are at 50-60%. We think they have turned more prudent in their lending practices and are therefore unlikely to compete aggressively for funds.
  • Having a larger proportion of CASA deposits also means that the banks have the flexibility to managing deposit costs.

Ng Li Hiang Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2017-06-14

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