Banking – Singapore - UOB Kay Hian 2017-11-01: Sep 17 Monthly Statistics ~ Slight Pick-up In Loan Growth

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

Banking – Singapore - Sep 17 Monthly Statistics: Slight Pick-up In Loan Growth

Loan growth for domestic lending picked up from 5.1% yoy in August to 6.2% yoy in September.
Growth in low-cost savings and demand deposits was healthy at 7.8% and 4.5% yoy respectively. Growth in foreign currency loans was also robust at 10.3% yoy.
Interest rates should be marching higher again as the US Fed is widely anticipated to hike Fed funds rate by another 25bp in Dec 17.

For domestic banking units (DBU), loans grew 6.2% yoy, a slight pick-up from 5.1% yoy in Aug 17 and 1% mom in Sep 17. Growth was driven by loans to businesses which saw an 8% yoy increase (general commerce: +16.4% yoy, business services: +22.2% yoy and non-bank financial institutions: +15% yoy). For consumer loans, housing loans and car loans grew by 4.2% and 4.4% yoy respectively.
Deposits grew by only 3.5% yoy, driven by 7.8% yoy expansion in low-cost savings deposits and 4.5% yoy growth in demand deposits.

For Asian currency units (ACU), loans expanded by a robust 10.3% yoy while deposits grew by a slower 4.4%. Loans to businesses increased by a stronger 12.1% yoy.

3-month SIBOR was stable at 1.13%. 3-month SOR has caught up, gaining 0.11% mom to 1.06% in Oct 17. There should be further upside to SIBOR and SOR given that the US Fed is widely anticipated to hike Fed funds rate by another 25bp in Dec 17.
Yields for 10-year and 15-year government bonds have increased by 13bp compared to 10bp for shorter dated 2-year government bonds.

The normalisation of central banks’ balance sheets coupled with resilient global growth could energise banks’ share prices and lift their valuations towards and above their mid-cycle valuations. Deregulation for banks and efforts towards reducing the corporate tax rate in the US also add to the positive sentiments.

Downsizing of the Fed’s balance sheet and more interest rate hikes in the US are positive for DBS due to its strong deposit franchise with high CASA ratio of 90.4% for Singapore dollar deposits.
Management has completed the review of DBS’ dividend policy. Interim dividend for 1H17 has increased from 30 to 33 S cents/share.
DBS has exposure of S$3b to 90 smaller offshore support companies. About 60%, or S$1.8b, of these smaller accounts are deemed vulnerable, which could result in new NPLs and higher specific provisions in 2H17.
Our target price of S$24.48 is based on 1.27x 2018F P/B, which is derived from the Gordon Growth Model (ROE: 9.9%, COE: 8.0% (Beta: 1.1x) and Growth: 1.0%).

The acquisition of Barclays’ wealth management business in Singapore and Hong Kong was completed in Nov 16 and added AUM of US$13b in 4Q16. AUM grew to US$95b as of Sep 17, which represents organic expansion of 20% ytd.
OCBC NISP was the star performer with earnings growth of 23% yoy in 9M17. Loans grew 17% yoy while NIM was attractive at 4.5%.
Restructuring at Great Eastern Malaysia to comply with the limit on foreign ownership could generate capital for re-investment in its core commercial banking franchise.
Our target price of S$13.56 is based on 1.44x 2018F P/B, which is derived from the Gordon Growth Model (ROE: 10.5%, COE: 7.75% (Beta: 1.05x) and Growth: 1.5%).

Rapid increase in the federal funds target rate (steep rate hikes) that may trigger capital outflows from countries in Southeast Asia.

Jonathan Koh CFA UOB Kay Hian | http://research.uobkayhian.com/ 2017-11-01

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 24.480 Same 24.480

NOT RATED Maintain NOT RATED 99998.000 Same 99998.000

BUY Maintain BUY 13.560 Same 13.560