Banking – Singapore - UOB Kay Hian 2018-01-02: Monthly Statistics Nov 17 – Consumer Loans Catch Up With Business Loans

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

Banking – Singapore - Monthly Statistics Nov 17 – Consumer Loans Catch Up With Business Loans

Loans to businesses maintained robust growth of 8.8% yoy while consumer loans picked up by 0.8ppt mom to 4.6% yoy in Nov 17.
Three-month SIBOR surged by 26bp to 1.46% in Dec 17, which augurs well for NIM expansion in 2018.
Our top picks are OCBC, followed by DBS.
Maintain OVERWEIGHT.

For the domestic banking units (DBU), loan growth maintained the trend of a gradual pick-up to 7.1% yoy in Nov 17, compared to 6.8% yoy in Oct 17. The pick-up was driven by consumer loans, where housing loans expanded 4.3% yoy (Oct 17: 4.1% yoy) while car loans grew 5.7% yoy (Oct 17: 4.5% yoy).
Growth in loans to businesses maintained strong growth of 8.8% yoy (general commerce: +13.6% yoy, transport, storage and communications: +9.3% yoy, non-bank financial institutions: +25.9% yoy and professional and private individuals: +10.9% yoy).
Deposits grew by only 1.8% yoy, driven by expansion in low-cost savings deposits of 5% yoy and demand deposits of 5.3% yoy. Fixed deposits contracted 3.1% yoy.

For the Asian currency units (ACU), loans expanded by a robust 8.5% yoy while deposits grew by a slower 2.7% yoy.

Three-month SIBOR raced ahead to gain 26bp mom to 1.46% in Dec 17. Three-month SOR gained a smaller 6bp mom to 1.17%. The upward momentum was in-line with the 25bp hike in the US Fed funds rate.
Yields for shorter dated two-year government bonds rose 20bp to 1.69%. Yields for 10-year, 15-year and 20-year government bonds decreased by 13bp, 13bp and 11bp mom respectively in Dec 17.

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 adds 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 S$ deposits.
DBS was recognised as the world’s best digital bank by Euromoney Awards for Excellence 2016. It beat competition from BBVA, Citigroup and ING as digital innovation permeates every part of the bank and is deeply ingrained in the bank’s 22,000 staff.
Our target price of S$26.10 is based on 1.38x 2018F P/B, which is derived from the Gordon Growth Model (ROE: 10.5%, COE: 8.0% (Beta: 1.1x) and Growth: 1.5%).

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.
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/ 2018-01-02

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 13.560 Same 13.560

BUY Maintain BUY 26.100 Same 26.100

NOT RATED Maintain NOT RATED 99998.000 Same 99998.000