Singapore Banks - Maybank Kim Eng 2016-10-07: Indonesia Tax Amnesty and SG Banks ~ A Closer Look

Singapore Banks - Maybank Kim Eng 2016-10-07: Indonesia Tax Amnesty and SG Banks ~ A Closer Look Singapore Banks DBS GROUP HOLDINGS LTD D05.SI  OVERSEA-CHINESE BANKING CORP O39.SI  UNITED OVERSEAS BANK LTD U11.SI 

Singapore Banks - Indonesia Tax Amnesty and SG Banks: A Closer Look

Expect limited impact despite pickup in repatriation 

  • In a recent report, our Indonesia Head of Research noted the material progress made with respect to the government’s tax amnesty programme (as of 4 Oct, total overseas asset repatriation accelerated to IDR137t [SGD14b] vs IDR58.3t [SGD6b] on 20 Sep). 
  • Indonesia’s tax officials said that declaration of assets in Singapore was IDR666.4b (SGD70.3b), of which IDR79.13t (SGD8.3b) has been repatriated. 
  • We, therefore, take a closer look at what it could mean for the Singapore banks’ operations that have been beneficiaries of Indonesia-sourced deposits and AUM over the years. 
  • Data from both regulator and the banks is lacking. But on the basis of some broad assumptions, we estimate the effect on the three banks from the outflow of two obvious identifiable areas:
    1. private banking assets, and 
    2. customer deposits. 
  • Overall, it suggests limited impact on both balance sheets and resultant valuations.

1. Take-up rate sped up in last week of Sep 

  • The declaration and repatriation of overseas assets of Indonesians has sped up as the tax amnesty programme completed its first trimester on 30 Sep. As of 4 Oct, total overseas asset declaration stood at IDR952t (SGD100b) vs IDR293t (SGD31b) on 20 Sep, and repatriation amounted to IDR137t (SGD14b) vs IDR58.3t (SGD6b) on 20 Sep.
  • Indonesia’s tax officials said that declaration of assets in Singapore is IDR666.4b (SGD70.3b), of which IDR79.13t (SGD8.3b) has been repatriated. Asset repatriation in Singapore has increased by more than 400% as compared to IDR14.1t (SGD1.5b) disclosed in mid-Sep. Asset repatriation in Singapore alone formed 58% of total asset repatriation.
  • It is difficult to quantify the amount of assets that will continue to be repatriated as assets such as properties and investments are harder to repatriate. While the SGD8.3b of assets repatriated from Singapore may not have a huge impact on Singapore at this moment, we want to assess various scenarios involving different levels of repatriation and their implications for the Singapore banking system and Singapore banks. A large capital outflow may exert subtle pressure on the SGD, tighten system/banks’ liquidity and reduce wealth AUM. Given the limited data, we had to work with some broad assumptions and there may be some degree of uncertainty to our estimates and interpretations.
  • We see two categories where the effects of the outflows can be seen more quickly: 
    1. decline in private banking assets; and 
    2. customer deposit outflows.

2. Assessing the impact for SG banks 

2.1 Decline in private banking AUM 

  • Singapore banks do not disclose the amount of private banking assets from Indonesians. Early this year, DBS’s CEO Piyush Gupta estimated that 10- 15% of its private banking book is from Indonesia. We think OCBC is more exposed to Indonesian wealth as ING Asia Private Bank and Barclays wealth management business in Singapore and Hong Kong, which OCBC acquired, have a presence in Indonesia.
  • In our scenario, we assumed 20% of OCBC’s AUM is from Indonesians as it is more exposed than peers and 15% of AUM for DBS and UOB given their smaller exposure. If all Indonesian AUM gets repatriated, OCBC would see a larger decline in total income, at 1.6% vs peers’ 0.4-1.1%. The decline in 2017E total income and net profits across Singapore banks will be manageable, at less than 1-2%, ceteris paribus.

2.2 Customers’ deposit outflow 

  • Total system (DBU and ACU) deposit growth has moderated to +2.2% YoY vs +8.8% a year ago. Transactions in SGD are largely booked in DBU (Domestic Banking Unit) while transactions in foreign currencies are booked in ACU (Asian Currency Unit). As Indonesians’ deposits are also in USD, one should not ignore the impact of deposit outflow from ACU.
  • MAS provides a breakdown of non-residents’ DBU deposits as well as ACU customer deposits by region (Indonesia is subsumed under East Asia by MAS definition). Unfortunately, we do not know how much of these deposits belong to Indonesians.
  • Therefore, we build in a scenario where we assume i) 20%, ii) 30% and iii) 50% of these non-residents’ deposits are from Indonesians.
  • If all funds get repatriated, ~SGD37-92b could potentially flow out of the system, of which ~SGD9-23b from DBU deposits and ~SGD28- 69b from ACU deposits. System liquidity will tighten. 
  • We estimate that 2017E system LDR will increase from 94.8% to 97.8%, 99.4% and 102.7% if deposits flow out by ~SGD37b, ~SGD55b and ~SGD92b respectively, ceteris paribus.
  • There is limited data on how much of these deposits are placed in Singapore banks. In the previous section, we estimate that 15-20% of wealth AUM is from Indonesians. 
    • If we use 20% as a proxy to estimate both Indonesians’ DBU and ACU deposits in Singapore banks, potential outflow could be ~SGD7-18b. Banks’ 2017E LDR will increase from 85.0% to 85.8- 86.9%, ceteris paribus. 
    • If we assume 50% of Indonesians’ DBU deposits and 30% of Indonesians’ ACU deposits are in Singapore banks, potential outflow would be ~SGD13-32b and banks’ LDR will increase from 85.0% to 86.4-88.5%.
  • The magnitude of customer deposit outflow at SGD37-92b may not have a significant impact to create liquidity issues for the system. SGD37-92b forms around 3-8% of total system deposits, which currently stands at SGD1.1t.
  • As to whether this will raise cost of funding for Singapore banks, we think SGD7-32b of potential deposit outflow may not be large enough to warrant a meaningful increase in cost of funding. With the exception of UOB (UOB had ~71% of total customer deposits in Singapore, at SGD177b as of June 2016), Singapore banks do not disclose customer deposits by geography.
  • Based on our estimation, SGD7-32b outflow is ~1-6% of Singapore banks’ customer deposits in Singapore.
  • Our view is that banks may reduce assets or find deposit growth to compensate for the outflow, assuming our estimates are correct. If there is a massive system deposit outflow, we do not rule out the possibility that banks may offer higher interest rates on deposits in order to compete more aggressively for the shrinking deposit base.

Maintain NEGATIVE 

  • Our bigger concern is Singapore banks will face worsening asset quality and slowing top-line growth. We remain NEGATIVE on the sector. 
  • Of the three banks under coverage, we prefer UOB.

Ng Li Hiang Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-10-07
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