Banks - CGS-CIMB Research 2019-11-30: Foreign Inflows A Likely Precursor To Wealth

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

Banks - Foreign Inflows A Likely Precursor To Wealth

• System loan growth was lacklustre at +0.4% m-o-m/+4.4% y-o-y, but it was encouraging that domestic expansion started outpacing regional again.
• Potential upside to wealth management income as FCY deposit inflow over Jul-Sep 2019 (+S$7.1bn) was at its strongest in over two decades.
• FDs contracted 0.4% m-o-m as 3MSIBOR edged lower. We expect benefits from cheaper funding to start kicking in – moderating NIM compression.
• Maintain NEUTRAL. Valuations are looking more attractive as trade war noise continues, but should remain supported by c.5% dividend yields. Prefer UOB (SGX:U11).

We expect FY20F loan growth to hover at c.4% amid muted outlook

• System loan growth was uninspiring at +0.4% m-o-m/+4.4% y-o-y in Oct 2019, but the bright spot in these statistics was the accelerating pace of domestic expansion – 2.6% y-o-y – compared to the year’s low of +1.4% y-o-y in Apr 2019.
• Two segments drove growth – business loans for general commerce and to financial institutions. System housing loans were flattish as regional mortgage growth offset the continued contraction in domestic housing loans (-1.6% over 9 months now).
• System loan growth could hover at c.4% in FY20F (FY19: c.5%) amid muted business sentiment, but spillover from the MTI’s more upbeat GDP growth forecast of 0.5-2.5% in FY20 (from 0.5-1% in FY19) provides upside to our forecasts.

Jul-Sep 2019 FCY deposit inflows strongest in over two decades

• DBU deposits recorded S$7.1bn in foreign currency deposit inflows over Jul-Sep 2019 – the largest increase over the past decade (for perspective, 1H19: -S$950m, FY18: +S$866m, FY17: -S$529m). We believe the diversion of funds into Singapore were fuelled by investors seeking a safe haven given the recent regional geopolitical events.
• Consistent foreign inflows could persist until some resolution is in sight, but the initial euphoria has since died down, with Oct 2019 foreign inflows normalising to just S$579m. We are optimistic that some of these deposits will be deployed into wealth management products, supporting fee income streams in FY20.

FD contraction to provide some respite in funding costs

• Fixed deposit growth has finally reversed, contracting 0.4% m-o-m as 3MSIBOR edged lower to an average 1.86% in Oct 2019 (from its peak of 2% in Jul 2019).
• Notably, 3MLIBOR had dipped 90bp since Jan 2019 on rate cut pessimism and we expect a lagged pass-through to SGD rates over FY20, as transpired during the period of Fed rate hikes. To this end, UOB (SGX:U11) expects the 3MSIBOR to trend towards 1.4-1.5% by end-2020; the banks expect a further 5-10bp NIM contraction over the year.
• We hold out for a concurrent fall in funding costs to provide some respite to narrowing margins.
• See
  • DBS Share Price; DBS Dividend History; DBS Announcements.
  • OCBC Bank Share Price; OCBC Bank Dividend History; OCBC Bank Announcements.
  • UOB Share Price; UOB Dividend History; UOB Announcements.

Andrea CHOONG CGS-CIMB Research | LIM Siew Khee CGS-CIMB Research | https://www.cgs-cimb.com 2019-11-30

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