Singapore Banking Monthly - Phillip Securities 2019-02-01: Consumer Loans Pulling Back But NIMs Stay Healthy

DBS GROUP HOLDINGS LTD (SGX:D05) OVERSEA-CHINESE BANKING CORP (SGX:O39) UNITED OVERSEAS BANK LTD (SGX:U11)

Singapore Banking Monthly - Consumer Loans Pulling Back But NIMs Stay Healthy

December’s domestic loans rose at a slower pace of 3.0% y-o-y. Held up by business loans which grew 4.1% y-o-y while consumer loan growth was the slowest in twelve years at 1.5% y-o-y.
December’s domestic deposits rose 3.5% y-o-y, boosted by fixed deposit growth of 10.5% y-o-y, the fastest in two years.
Mortgage loan growth continues to slow to 2.0% y-o-y after peaking in May 2018.
Hong Kong’s December loans growth recovered to 4.4% y-o-y after plunging to 2.0% y-o-y in October.
January’s 3M SIBOR reached 11 year-high at 1.891%, up 0.54bps m-o-m.
Maintain OVERWEIGHT for the Singapore Banking Sector.

December’s domestic loans growth was held up by business loan growth of 4.1% y-o-y mainly attributable to Building & Construction’s loan growth acceleration to 12.5% y-o-y. This is the highest in two and a half years due to the drawdowns of loans from existing projects in the pipeline. However, we expect business loan growth for new construction projects and consumer loan growth for mortgage loans to wind down in 2019 due to the onset of property cooling measures effect.
Meanwhile, consumer loan growth weakened to 1.5% y-o-y (slowest in twelve years) mainly due to the continued slowdown of mortgage loans to 2.0% y-o-y after peaking in May 2018 at 4.8% y-o-y. Car loan growth slowed to 5.5% y-o-y as compared to 2018 monthly average of 7.6% y-o-y. We expect loan growth for the banks to slow to 6-7% for FY2019e as compared to 8-9% in FY2018e.

The financial industry has been aggressively plumping up their fixed deposits since August 2018 due to rising interest rates. Singapore’s fixed deposits registered the highest growth in two years at 10.5% y-o-y as compared to FY2018’s monthly average growth of 1.6% y-o-y.
Deposit growth from Government & Statutory Authorities surged 9.2% y-o-y, the fastest in two years. While non-bank financial institutions grew 7.9%, the fastest since June 2017.
As the financial sector bulks up in pricier fixed deposits, this could result in a squeeze in NIM in the near term but NIM should gradually expand as the banks progressively deploy their stash of deposits as loans repriced at higher rates. December’s market share of fixed deposits and CASA deposits are 39.3% and 60.7% respectively.

Hong Kong’s property market continues to slow in December with both residential sales and purchase value and volume contracting 7.5% and 21.8% m-o-m respectively. Home prices in Hong Kong have started to roll-over (Figure 7). Since the peak in July 2018, prices have softened by 7.5% in December 2018. However, the upward trajectory of interest rates should support the Hong Kong’s banking sector’s NIM.

3-month SIBOR came in 1.891%, surpassing last month’s high of 1.886%. 3-month SOR expanded 5.45bps m-o-m to 1.973%. SIBOR and SOR rose 76 bps YTD and 92 bps YTD respectively in FY2018. Meanwhile, the savings rate in Singapore remained unchanged at 0.16%.
With loans pegged to floating and fixed rates taking months and years respectively to reprice, we will continue to see NIM expansion even if there is a pause in interest rate hikes. Hence a large proportion of the rise in interest rates has yet to flow into the Singapore banks’ books with more expected to flow-through in 2019 and beyond.

We remain positive on the sector’s continued NIM expansion and rising dividend as a share price catalyst in the next two quarters. The banking sector is paying out a dividend yield of almost 5%.
Slower loan growth for the UNITED OVERSEAS BANK LTD (SGX:U11), DBS GROUP HOLDINGS LTD (SGX:D05) and OVERSEA-CHINESE BANKING CORP (SGX:O39) is expected at c.6-7% in 2019e as compared to c.8-9% in 2018e. Property cooling measures, rising interest rates and slowing global growth will be headwinds in loan demand. There is also dividend yield support of c.5% for the sector.
The key catalyst for the banks is the NIM expansion which lies in rising interest rates. We believe the Singapore banks can keep their cost of funds low enough to achieve sequential NIM expansion in the next few quarters. The long-term trend of NIM expansion will offset some of the downsides in loans growth.

Tin Min Ying Phillip Securities Research | https://www.stocksbnb.com/ 2019-02-01

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