DBS GROUP HOLDINGS LTD (SGX:D05)
OVERSEA-CHINESE BANKING CORP (SGX:O39)
UNITED OVERSEAS BANK LTD (SGX:U11)
Singapore Banks - Trade’s Not Dead?
Systems loans remain resilient. Potential for earnings surprise
- Singapore banking system loans expanded 4.7% y-o-y in May 2019, according to data released by MAS. This is the fastest pace of growth since January 2019. While ACU driven overseas loans made up the bulk of the growth (+7.5% y-o-y), domestic loans also gained momentum, rising 2.1% y-o-y vs. 1.4% the month before.
- Surprisingly, trade-related sectors such as manufacturing and transportation saw strong expansion both domestically and overseas. This is counterintuitive given slowing trade and economic growth outlook due to the fallout from the US-China trade war. We believe this rising credit demand may be a sign of manufacturing & logistics capacity re-locating from China and ramping up in ASEAN.
- Given the Singapore banks’ deep exposure to ASEAN, they are likely benefitting from this trend, in our view. Continued strength in loan growth may result in positive earnings surprises.
- UOB (SGX:U11) is our top pick.
Surprising strength in Trade-related sectors
- ACU manufacturing loans increased 20.7% y-o-y, while domestically this increased 6% y-o-y, double the pace from April. Manufacturing loan utilization jumped to 59.2% - the highest level since June 2017. Other trade related sectors, such as transport & storage also increased 9% y-o-y on a full system basis.
- We also note building & construction lending picked up 15.2% y-o-y led by ACU (up 22% y-o-y). We believe these indicators point to increasing manufacturing utilization and capacity in ASEAN.
- With more than a quarter of Singapore banks’ loans booked in ASEAN, this is a sign of the sector benefitting from this trend, in our view. Nevertheless, given uncertain macro conditions, asset quality here needs to be watched closely.
Mortgages remain depressed
- Consumer loan growth remained muted, increasing just 1.2% y-o-y. Domestic consumer loans contracted 0.4% y-o-y – the first negative reading since 1992. This was driven by weak mortgages, which contracted 0.3% y-o-y, while share financing fell 11% y-o-y.
- Government property cooling measures continue to bite and this is creating a risk of heightened mortgage competition for market share amongst domestic lenders. Ultimately, this may have a negative impact on margins.
Lower rates may add more fuel to the fire
- The continued strength of loan growth, despite a cautious economic backdrop, may create the potential for earnings surprises. This provides additional support for dividend visibility, in our view.
- We remain positive on the sector with UOB (SGX:U11) as our top pick.
Thilan Wickramasinghe
Maybank Kim Eng Research
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https://www.maybank-ke.com.sg/
2019-07-01
SGX Stock
Analyst Report
29.460
SAME
29.460
11.070
SAME
11.070
28.970
SAME
28.970
