Singapore Banks - Maybank Kim Eng 2019-09-30: August Rising

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

Singapore Banks - August Rising

According to MAS, August’s system loan growth was 5.1% y-o-y – its strongest in eight months. As in July, the momentum was driven by ACU business lending. Climbing ACU loans to manufacturing, building & construction and holding companies point to an ongoing relocation of production capacity from China to ASEAN.
Stronger-than-anticipated loan growth has the potential to produce 3Q19 upside surprises, especially for UOB (SGX:U11) and OCBC (SGX:O39), given their strong ASEAN franchises.

ACU business loans increased 8.1% y-o-y in August – its fastest since Nov 2018. Lending to manufacturing (+16% y-o-y), construction (19%), business services (+21%) & holding companies (15%) was strong. Business loan utilisation remained un-stretched at 50%, suggesting no major distress in the system. We believe the growth was spurred by production relocation from China to AESAN amid the trade war.
Given long cycle times required for the full deployment of new production assets, we think ACU loan growth may remain strong in the medium term. Separately, despite negative macro readings, domestic lending also increased at its fastest 2.2% y-o-y in five months. This growth was similarly led by business loans, while consumer lending contracted 1.1% y-o-y. The latter reflected lower mortgage demand.

System deposits increased 8.1% y-o-y, as FX deposits rose 51% y-o-y, their biggest surge since Jul 2008. Fixed deposits from residents outside Singapore increased 41% y-o-y while demand deposits rose 15% y-o-y. As the beginning of this escalation dovetailed with political volatility in Hong Kong, this may signify safe-haven funds flows into Singapore.
The overall impact on system liquidity, however, is limited, as non-resident funds account for just 7% of deposits. Nevertheless, banks with strong private banking franchises – DBS (SGX:D05) and OCBC (SGX:O39) – may see upside from liability products and fee-income, in our view.

Stronger-than-expected loan growth may produce earnings upside in 3Q19, especially for UOB (SGX:U11) and OCBC (SGX:O39). A fifth of their loans is booked in ASEAN. That said, our recent D-Lab series (see report: Singapore Banks - Artificial Relationship) , which utilises machine learning to determine NPL drivers for Singapore banks, points to rising NPL risks from ACU lending. This needs to be closely watched.

Thilan Wickramasinghe Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2019-09-30

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