Singapore Banking Monthly - Phillip Securities 2019-05-03: Mortgage Weakness Persists

Singapore Banking Monthly - Phillip Securities Research | SGinvestors.io DBS GROUP HOLDINGS LTD (SGX:D05) UNITED OVERSEAS BANK LTD (SGX:U11) OVERSEA-CHINESE BANKING CORP (SGX:O39)

Singapore Banking Monthly - Mortgage Weakness Persists

  • March 2019’s domestic loans growth slowed further to 2.2% y-o-y. Building and construction loans growth outpaced the industry.
  • Mortgage loans growth continues to decelerate to 0.9% y-o-y.
  • Domestic deposits rose 6.4% y-o-y, boosted by fixed deposit growth of 20.0% y-o-y, the fastest in almost twelve years. CASA deposits contracted 1.4% y-o-y.
  • April 2019’s 3-month SIBOR and SOR rose slightly by 0.12bp and 4.0bps to 1.946% and 1.973% respectively.
  • Maintain OVERWEIGHT for the Singapore Banking Sector.



Singapore’s March loans growth slowed further to 2.2% y-o-y (February: 3.3% y-o-y)

  • March 2019’s loans growth was held up by business loan growth of 3.4% y-o-y (see Figure3 in attached PDF report). Building and Construction (B&C) loan growth which made up 33.2% of total business loans, remained robust at 11.5% y-o-y, as compared to a monthly average of 4.9% y-o-y in 2018. These are drawdowns of loans from existing projects in the pipeline. We expect B&C loans growth to decelerate around end 2019 due to property cooling effects.
  • Meanwhile, consumer loans growth continues to be hampered by weak mortgage loans growth. Mortgage loans growth slowed to 0.9% y-o-y due to property cooling measures, rising interest rates and subdued rental markets. This continuous slowdown in mortgage loan growth is a red flag for the Singapore banking sector loan business whose mortgage loans made up 30% of total domestic loans in Singapore. Similarly, mortgage loans as a proportion of total loans for DBS GROUP HOLDINGS LTD (SGX:D05), UNITED OVERSEAS BANK LTD (SGX:U11) and OVERSEA-CHINESE BANKING CORP (SGX:O39) stand at 21%, 26% and 25% respectively.
  • While SIBOR and SOR have been rising steadily since 2016, they appear to be consolidating near the 2% mark since the start of this year. Hence, interest rate pressures on mortgage loans may be capped at this level. Due to a challenging business environment, we expect loans growth for the Singapore banks to slow to 4-6% for FY2019e as compared to 7-11% in FY2018.


CASA Deposits – Contracting CASA ratio growth in the sector

  • CASA deposits growth contracted 1.4% y-o-y, the slowest in 3 years (see Figure1 in attached PDF report). Fixed deposits surged 20.0% y-o-y in comparison to FY18’s monthly average of 1.6% y-o-y.
  • With a higher proportion of fixed deposits in the deposits mix, the cost of fund rises, making it a constant challenge for banks to manage costs well enough to achieve NIM expansion. However, we expect competition for fixed deposits to taper off in the 2H19 and funding pressure could ease since no more rate hikes are expected in 2019 in the U.S.


2019 April’s 3-month SIBOR at 1.946%, 0.12 bps above last month’s 1.944%

  • 3-month SOR rose 4.0bps m-o-m to 1.973%. Meanwhile, the savings rate in Singapore remained unchanged at 0.16%. Despite the dovish tone set by the US Federal Reserve, we expect the banks to deliver NIM improvements due to the lagged effect of loan repricing.


Interest Rates – Lagged effect of interest rate pass-through

  • A portion of the loan book reprices almost immediately and the remaining loans to be repriced over the next two to three years. Hence there is a lag effect in repricing the entire loan book as SIBOR and SOR rises.
  • With the pause in Fed rate hikes now is probably last time for Singapore banks to hike their board rates and reprice their loans before interest rates start to tail down.


Investment Actions


Maintain Singapore Banking Sector at Overweight.

  • We expect further upside in NIM improvements from the full impact of loan repricing. Low provisions and better cost management should also provide upsides to ROE improvements.
  • The banking sector provides an attractive dividend yield support of c.5%. All three banks’ robust CET-1 ratios should sustain current payout ratios.
  • Key risks include
    1. lower pass-through of interest rates;
    2. margins threatened by costlier funding as interest rates rise in the region;
    3. market volatility to pressure Treasury Market revenues downwards;
    4. CIR ratio weakened by investment costs.





Tin Min Ying Phillip Securities Research | https://www.stocksbnb.com/ 2019-05-03
SGX Stock Analyst Report ACCUMULATE MAINTAIN ACCUMULATE 29.000 SAME 29.000
BUY MAINTAIN BUY 32.000 SAME 32.000
BUY MAINTAIN BUY 13.700 SAME 13.700



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