Singapore Banking Monthly - Phillip Securities 2018-07-02: Positive Loan & Margin Trends Intact

Singapore Banking Monthly - Phillip Securities Research 2018-07-02: Positive Loan And Margin Trends Intact Singapore Banking Stocks Outlook DBS GROUP HOLDINGS LTD SGX:D05 OVERSEA-CHINESE BANKING CORP SGX:O39 UNITED OVERSEAS BANK LTD SGX:U11

Singapore Banking Monthly - Positive Loan And Margin Trends Intact

  • Singapore’s domestic loans rose 5.5% y-o-y in May, but still a modest acceleration from the 1Q18 growth of 4.8%.
  • Loans growth in Hong Kong tapered to 12% in May.
  • 3-month SIBOR and HIBOR near 10-year highs in June.
  • Maintain ACCUMULATE for the Singapore Banking Sector.

Singapore’s domestic loans in May grew 5.5% y-o-y

  • Loans growth in May was driven by business loans that rose 5.8%. Consumer loans growth in May was 5.0% y-o-y, sustaining the strong momentum experienced since November. Mortgage loans expanded 4.8% y-o-y, the highest in almost 3 years. Car loans growth reached its 5-year highs with an increase of 7.8% y-o-y in May.
  • We believe the domestic economy is beginning to gather stronger economic momentum. Worry will be the escalation of bilateral US-China trade tariffs that raise the risk of a global trade slowdown.

Hong Kong’s loans in May grew 12% y-o-y – slowest in 13 months

  • Loan growth in Hong Kong for 2QMay18 increased 14.5% y-o-y. This is a deceleration from 1Q18’s 15.7%. Hong Kong's residential volume and value showed renewed vigour after some weakness in January.
  • According to JLL Hong Kong, May residential sales volume and value were down 16.9% m-o-m and 15.6% m-o-m respectively. Residential sales could be held back by the impending vacancy tax announcement in end June, in hopes that supply would be boosted and prices stabilised.

More upside in interest rate margins

  • Both 3-month SIBOR and HIBOR rose in June to near 10-year highs. With the expectation of 2 more Fed rate hikes in 2018, NIM expansion will be the major earnings catalyst.
  • Despite the 40bps increase in SIBOR this year, mortgage loans growth has remained resilient at 4.8% y-o-y.
  • SOR has recorded an even sharper spike in interest rates. Average SOR in 2Q18 doubled y-o-y. Saving rate in Singapore was unchanged at 0.16%.

Offshore oil and gas NPLs are unlikely to worsen with recovery in oil prices

  • Global jack up utilisation rate has bottomed out in February and is now hovering at a 2-year high. However, this was not enough to spark any recovery in day rates, which fell further to decade lows. Market need much higher utilization rates to raise day rates as the industry is in structural overcapacity.
  • Recovery in oil prices will provide a positive backdrop for increased rig activity and eventually higher day rates. O&G NPLs are unlikely to worsen, as the increased business volume is likely to generate cash flows to service their loans.


Maintain Singapore Banking Sector at ACCUMULATE.

  • Loans growth will be supported by export and manufacturing sectors as well as the recovery in property sector sales volume. The vibrant loans growth in Hong Kong should help banks meet or exceed the high single- digit loans growth target. 
  • The continuing rise in SIBOR and SOR will keep NIMs elevated. Potential trade war escalation poses the greatest risk at the moment, especially to loans growth and even asset quality. 
  • In conclusion, banks are enjoying both expanding loans volume and interest margins this year.

Rating Forecast Dividend (SGD) Target Price (SGD) Total Return
DBS Group Holdings (SGX:D05) Accumulate (Maintain) 1.20 32.70 27.40%
Oversea-Chinese Banking Corp (SGX:O39) Accumulate (Maintain) 0.40 14.90 31.44%
United Overseas Bank Limited (SGX:U11) Accumulate (Maintain) 1.00 31.70 22.20%

Tin Min Ying Phillip Securities Research | https://www.stocksbnb.com/ 2018-07-02
SGX Stock Analyst Report ACCUMULATE Maintain ACCUMULATE 32.700 Same 32.700
ACCUMULATE Maintain ACCUMULATE 14.900 Same 14.900
ACCUMULATE Maintain ACCUMULATE 31.700 Same 31.700