Singapore Banks - CGS-CIMB Research 2020-11-30: System Flush With Liquidity

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Singapore Banks - System Flush With Liquidity

System loans dipped 0.3% m-o-m in Oct 20 as both domestic and regional business activity stayed muted. Consumer growth, however, was positive.
Deposit growth stayed healthy at +1.5% m-o-m in Oct 20, underscored by S$ CASA mainly from residents inside SG as FCY growth momentum tapers.
Bottomed-out benchmark rates support NIM expansion ahead, although flush liquidity levels amid limited credit demand may hamper margin stabilisation.
Reiterate Overweight as we think the market has started looking past asset quality concerns and started pricing in recovery towards double-digit ROEs.

System loans (DBU + ACU) contracted 0.3% m-o-m in Oct 20 as business sentiment on both the domestic (-0.3% m-o-m/-2% y-o-y) and regional (-0.4% m-o-m/+0.2% y-o-y) fronts stayed muted.
Domestically, the contraction came mainly from the financial institutions sector (-2.4% m-o-m), with a third consecutive month of decline.
Meanwhile, the regional decline stemmed primarily from the manufacturing (-3.3% m-o-m) and general commerce (-3.1% m-o-m) sectors while loans for business services were +11.1% m-o-m. Consumer loan growth in both markets (domestic [DBU]: +0.4% m-o-m, regional [ACU]: +1.8%) kept their positive streaks.
While the expansion in Singapore was mainly supported by housing loan growth (+0.3% m-o-m) amid a slight decline in credit card spending (-0.1% m-o-m), the uptake of personal loans (+1.9% m-o-m) contributed almost all of the regional increase.
On balance, total system loans contracted 0.7% in 10M20 (FY19: +4.2%).

DBU deposits rebounded +1.5% m-o-m (+S$11.2bn) in Oct 20, coming off a 0.5% m-o-m (- S$4.1bn) compression in Sep 20 as deposits from government institutions and FIs exited the system (likely placed in higher-yielding assets). Most of the Oct 20 growth was contributed by residents in Singapore (+S$8.6bn), while inflows from residents outside the city state accounted for a smaller +S$543m. Correspondingly, the deposit growth was mainly denominated in S$ (+S$8.1m).
Barring the uptick of FCY-denominated deposits in Oct 20 (+S$3.1bn), growth momentum of this class of deposits slowed to +S$7bn in Feb- Oct 20, compared to a significant +S$14.5bn over Jun 19-Jan 20, as geopolitical pressures eased, in our view.

3MSIBOR/SOR/LIBOR settled at an average 0.40%/0.18%/0.22% in Oct-Nov 20, easing just 3bp/1bp/3bp from the average in 3Q20. The stark moderation in compression (vs. the c.23-34bp decline in 3Q20 and c.83-93bp decline in 2Q20) is a reinforced indication of a stabilisation in Singapore banks’ NIMs going into FY21F.
Although some tailwind effects of the benchmark rate compression on asset yields in 4Q20F may be expected, we believe that funding cost savings will offset this.
Notably, all of the DBU deposit growth in Oct 20 came in the form of CASA, as fixed deposit balances dipped as these balances matured on the back of less attractive rates of 0.5-0.6% for 10-12 month placements in local banks (vs. 1.8% in Mar 20 before the Fed rate cuts). However, we stay cognisant on the impact of the strong liquidity inflows on bank leverage (as system LDR reduced to 92.5% from 100% in Mar 20) offsetting the effects of funding costs savings on NIMs.

Andrea CHOONG CGS-CIMB Research | LIM Siew Khee CGS-CIMB Research | https://www.cgs-cimb.com 2020-11-30

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