Singapore Banking Monthly - Phillip Securities 2019-06-06: Slow But Sustainable Growth

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

Singapore Banking Monthly - Slow But Sustainable Growth

  • Singapore loan growth slowed further to 1.4% y-o-y. Consumer loans contracted for the first time in decades, hammered by persistent weakness in housing loans.
  • Domestic deposits rose 7.1% y-o-y, held up by fixed deposit growth of 21.6% y-o-y, the fastest in almost twelve years. CASA deposits continues to contract at -1.1% y-o-y.
  • 3-month SIBOR and SOR rose 6.2bps and 8.0bps to 2.007% and 2.052% respectively.
  • Maintain the Singapore Banking Sector at Overweight. While the trade war affects investor sentiments in the near term, we believe the banks’ fundamentals remain intact to withstand risks and deliver growth on a sustained basis.



Singapore’s April loan growth slowed further to 1.4% y-o-y (March: 2.2% y-o-y)

  • April’s loan growth was held up by business loan growth of 2.3% y-o-y. Building and Construction (B&C) loans made up 33.7% of total business loans, and its growth remained robust at 13.0% y-o-y due to drawdown of loans from existing projects in the pipeline. We expect property cooling effect to hit B&C loan growth near end 2019.
  • Consumer loans contracted for the first time in decades, hammered by persistent weakness in housing loans. Housing loan growth was flat-lined at 0.1% y-o-y, curbed by property cooling measures and high interest rates. Housing loans make up a substantial part of the lending business (30% of total loans). Our worry is the continuous contraction in loans which may limit the upside in net interest margins due to competition.
  • Loan growth is expected to be muted at mid-single-digit growth this year due to property cooling measures (which proved effective in curbing housing demand) and slowing economic growth. We expect loan growth for the Singapore banks to slow to 4-6% for FY2019e (2018: 7-11%).


Deposits – Contracting CASA

  • CASA deposits contracted 1.1% y-o-y, the slowest in 3 years. Fixed deposits continues to surge, growing 21.6% 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 to ease since no more rate hikes are expected in 2019 in the U.S.


May’s 3-month SIBOR at 2.007%, 6.2bps above last month’s 1.946%

  • 3-month SOR broke above the 2% level as well, rising 8.0bps m-o-m to 2.052%. Meanwhile, the savings rate in Singapore remained unchanged at 0.16%. However, we believe the pause in interest rate hikes limits the upside for NIM expansion. As we reach the end of the interest rate cycle, 2Q19 results may be the last NIM rally for the year.
  • We still expect the banks to deliver full year NIM improvements due to the lagged effect of loan repricing, albeit at a lower magnitude of around 4 bps in FY19e.


Hong Kong’s April loan growth fell to 0.5% y-o-y

  • Loan growth of 0.5% y-o-y in April was the slowest in almost 3 years. Hong Kong’s loan demand remained cautious due to high interest rates and lingering trade tensions. Hong Kong’s April residential sales and purchase value and volume rose 52.8% and 49.5% m-o-m respectively. Home prices in Hong Kong recovered back to the peak levels last seen in July 2018.
  • Meanwhile, 3-month HIBOR rose 5.3bps to 2.135%. Higher interest rates should support the banking sector’s profitability.


Investment Actions


Maintain the Singapore Banking Sector at Overweight.

  • While the trade war affects investor sentiments in the near term, we believe the banks’ healthy fundamentals remain intact to withstand risks and deliver growth on a sustained basis.
  • Operating environment remains stable despite slowing regional growth. Asset quality is benign although SME portfolio might face some stress from slowing trade flows. Increasing diversification of the banks’ business into more stable fee income (loan, credit card, wealth management etc) to reduce proportion of earnings arising from volatile revenue streams (trading income, investment gains etc). Better cost management and low provisions should also provide uplift to ROEs. The banking sector provides an attractive dividend yield support of c.5%, secured by strong capital ratios.
  • UOB remains as our top pick mainly because of its exposure to trade war effects being relatively muted as compared to its peers. As of 1Q19, UOB’s profit before tax arising from Greater China and Hong Kong loans is 10% (DBS: 29% and OCBC: 19%).

Our recommendation will be subject to changes based on the following re-rating catalysts.

  • Risks
    1. Miss in CIR % target due to higher spending on investments.
    2. Limited rise in interest rates and rising competition resulting in lower than expected NIM.
    3. Volatility leading to higher capital market-linked revenue losses.
    4. Changes in market-linked assumptions resulting in higher ECL.
    5. Deterioration in SME portfolio quality.
  • Upside
    1. Earlier than expected CIR % improvement with digitization.
    2. Better credit quality leading to higher write backs.
    3. Sharp increase in SIBOR and HIBOR resulting in higher margins through loan repricing.
    4. Increase in oil prices to ease asset quality issues.


Target Price & Rating:






Tin Min Ying Phillip Securities Research | https://www.stocksbnb.com/ 2019-06-06
SGX Stock Analyst Report ACCUMULATE MAINTAIN ACCUMULATE 29.000 SAME 29.000
ACCUMULATE MAINTAIN ACCUMULATE 12.70 SAME 12.70
ACCUMULATE MAINTAIN ACCUMULATE 30.900 SAME 30.900



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