Banks - CGS-CIMB Research 2019-06-28: May The Growth In Domestic Loans Continue

Singapore Banks - CGS-CIMB Research | SGinvestors.io DBS GROUP HOLDINGS LTD (SGX:D05) UNITED OVERSEAS BANK LTD (SGX:U11) OVERSEA-CHINESE BANKING CORP (SGX:O39)

Banks - May The Growth In Domestic Loans Continue

  • System loans growth picked up to +4.7% y-o-y in May 2019 on steady regional expansion. Domestic growth of 0.8% m-o-m is at its strongest since Jun 2018.
  • The upside was driven by domestic business loans from general commerce (+4% m-o-m) and manufacturing (+3.2% m-o-m). Housing loans slid 0.1%.
  • Maintain NEUTRAL with UOB as top pick. Stable asset quality and dividend yields provide valuation support. Sector trades below mean at 1.1x FY19F P/BV.



Stronger showing of domestic growth may taper in 2H19

  • System loans growth (Domestic Banking Unit [DBU] and Asian Currency Unit [ACU]) was encouraging at +4.7% y-o-y in May 2019. Contributions from regional operations was a tad stronger at +7.5% y-o-y but the upside surprise came from improved domestic business loan growth of +1.5% y-o-y – its strongest since Mar 2018.
  • Housing loans contracted for a fourth straight month (-0.1% m-o-m) but we are optimistic of better take-up rates from the enlarged pipeline of HDB minimum occupancy periods coming due in 2H19.
  • While the figures appear encouraging, our FY19 expectations are tempered by bleaker global economic conditions; CGS-CIMB’s economics research team has moderated Singapore’s FY19 GDP growth forecast to 1.8% (from 2.3%) on the back of weakened IPI readings in Apr-May. We hold our loan growth expectations across Singapore banks at c.4-5% in FY19 on account of flow-through from M&A transactions and upside from mortgages.


3MSIBOR could be peaking; NIM support from HIBOR spreads

  • With S$ rates historically trailing US$ rates, we could potentially see 3MSIBOR trending downwards in upcoming quarters; average 3MSIBOR rose 4bp q-o-q to 1.96% in 2Q19 as average 3MLIBOR contracted 16bp to 2.53%.
  • Wider 1M-3M HIBOR spreads over the past quarter paint a rosier picture; DBS and OCBC could be key beneficiaries of better HK margins in 2Q19 given their larger Greater China franchises.
  • Key downside risk to the sector is a Fed rate cut.


Funding pressures not letting up yet

  • We believe that the stronger domestic loan growth had fueled banks’ appetites for funding in May 2019. The continued rise in fixed deposit (FD) balances of +22% y-o-y came at the expense of CASA which contracted further by 1.1% y-o-y.
  • Unsurprisingly, the CASA to FD (DBU) deposit mix has now skewed towards 58:42 from 63:37 a year ago. While a potential Fed rate cut may see funding pressures easing as early as in 2H19, FD rate pricing has not shown signs of waning.
  • Nonetheless, we expect tailwind effects from Singapore banks’ mortgage board rate repricing efforts to support 2Q19 NIM expansion.


Maintain NEUTRAL; valuations supported by asset quality and yields

  • We maintain our NEUTRAL call on the sector given its dim growth prospects and moderated NIM outlook. Risks to the sector are compounded by potential Fed rate cuts. We believe that stable asset quality and attractive yields provide some baseline support for the sector.
  • Sector preference is UOB, OCBC, then DBS.


Highlighted Companies


DBS GROUP HOLDINGS LTD (SGX:D05)

  • HOLD, Target Price S$27.64.
  • Loan growth came in at just 0.6% in 1Q19, but the bank maintains its mid-single-digit guidance for FY19. NIM expanded steadily by 1bp in 1Q19 – on track to meeting our 5bp expectations.

OVERSEA-CHINESE BANKING CORP (SGX:O39)

  • HOLD, Target Price S$12.59
  • Despite the weak 0.3% q-o-q loan growth showing in 1Q19, OCBC recorded the strongest NIM expansion amongst peers. More repricing effects could spill over into 2Q19, thus boosting margins.

UNITED OVERSEAS BANK LTD (SGX:U11)

  • ADD, Target Price S$29.58
  • UOB’s 1Q19 loan growth was the strongest amongst peers at +3.0% q-o-q. However, NIM expansion has underperformed its peers, having contracted for four consecutive quarters





Andrea CHOONG CGS-CIMB Research | LIM Siew Khee CGS-CIMB Research | https://research.itradecimb.com/ 2019-06-28
SGX Stock Analyst Report HOLD MAINTAIN HOLD 27.640 SAME 27.640
ADD MAINTAIN ADD 29.580 SAME 29.580
HOLD MAINTAIN HOLD 12.590 SAME 12.590



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