Singapore Banking Monthly - Phillip Securities 2021-06-07: All Eyes On Economic Recovery Following Phase 2 (Heightened Alert)

Singapore Banking Monthly - Phillip Securities Research | SGinvestors.io DBS GROUP HOLDINGS LTD (SGX:D05) OVERSEA-CHINESE BANKING CORP (SGX:O39) UNITED OVERSEAS BANK LTD (SGX:U11)

Singapore Banking Monthly - All Eyes On Economic Recovery Following Phase 2 (Heightened Alert)

  • Singapore loan growth was flat at 0.4% y-o-y in April. Business loans contracted for eighth straight month by 1.4% y-o-y. Consumer loans up for ninth straight month by 0.3% y-o-y, aided by loan demand recovery in the housing segment.
  • NIMs stabilised in 1Q21 with overall GPs easing. With sufficient buffers built up, GP reversions expected for rest of 2021.
  • Maintain OVERWEIGHT. Loans remain on path of recovery on stable interest rates. Catalysts to come from a relaxation of dividend caps on banks. We believe MAS could ease the dividend cap as Singapore banks have kept sufficient capital buffers.
  • We prefer OCBC (SGX:O39) for sector exposure due to its wealth-management and insurance franchise.

Local lending rates dipped in May

  • Interest rates reversed their gains in the last four months to dip in May, with 3M-SIBOR and 3M-SOR falling to 0.44% and 0.23% respectively. Current 3M-SIBOR is 2bps higher than the 1Q21 average of 0.26%. 3M-SOR is 2 bps lower its 1Q21 average of 0.42%.

NPLs stable as loans under moratorum start to decline

  • As the blanket loan moratorium in Singapore rolled off at the end of 2020, loans under moratorium across the banks have started to decline. Moratorium loans for DBS (SGX:D05) and OCBC declined from about 3% and 4% respectively as at end-Dec 2020 to 1% and 2% in 1Q21. UOB (SGX:U11)’s loans under government relief, bank relief and ESG loan schemes are 90% collateralised. They made up 5% of its loan book in 1Q21, down from 9% in December 2020. As more loans unwind from moratorium for the rest of 2021, we expect NPL ratios to stay stable.

NIMs stabilised with potential for GP reversions for rest of 2021

  • Banks’ NIMs stabilised in 1Q21, with loans growth rebounding marginally and net interest income up 1% on average. For FY21e, we expect loans growth to average 5%. Net fees and commissions grew the most, led by wealth-management and card-related fees.
  • In view of the improving economic outlook, the banks eased GPs during the quarter. DBS reversed S$190mn of provisions made in prior quarters. For the rest of 2021, the banks have guided for an easing of credit costs. With total allowance coverage over 30% above MAS’ regulatory limit, we believe there is further room for GP reversions in 2021.

Weakness observed in loans growth

  • Domestic loans growth rose 0.4% y-o-y in April, tracking below our expected range of 2% – 3% for 2021.
  • Business loans contracted by 1.4% y-o-y in April, for the eighth straight month as loan demand from manufacturing, transport, storage and communication and business services dropped.
  • Consumer loans were up 0.3% y-o-y in April for the ninth straight month, aided by loan demand recovery in the housing segment. Housing loans, which make up three-quarters of consumer lending, extended their growth streak for the eighth straight month, up 0.4% to S$204.7bn for the month.
  • Overall, loans through the domestic banking unit – which captures lending in all currencies but reflects mainly Singapore-dollar lending - rose for the sixth consecutive month. They were up 0.1% in April to S$692.2bn, albeit slower than the 0.7% increase in March.

Volatility rose as Singapore entered Phase 2 (Heightened Alert)

  • SGX (SGX:S68)'s SDAV grew 5% y-o-y to $1.579mn in May, reversing its three month decline as Singapore’s move toward Phase 2 (Heightened Alert) elevated trading.
  • VIX averaged 19.8 in May, rising from 17.4 in the previous month as the surge in COVID-19 community cases sent it higher. DDAV will likely rise in May, bolstered by short-term trading volumes.
  • Tunrover volume for SGX’s newly-launched FTSE Taiwan Index Futures was 1.99mn in April, overtaking the performance of its MSCI predecessor a year ago by 29.2%.

Investment Action


  • Despite the run-up in banks’ share prices in 1Q21, we remain positive on the upside potential. The banks have traded above 1.4x P/B over the last five year and are currently trading close-to or below our targeted P/B. Our forward P/B targets are supported by improving ROEs as allowances reverse in FY21e. With total allowance coverage of the banks over 30% above MAS’ regulatory limit, we believe there is further room for GP reversions in 2021. This would boost earnings.
  • We also believe the MAS will ease the dividend cap imposed on Singapore banks as they have kept sufficient capital buffers. Capital ratios of 14.3% - 15.3% are higher than the MAS’ ideal operating range of 12.5 – 13.5%. This is supportive of a resumption of pre-COVID dividend payouts once dividend restrictions are lifted. We believe the banks could pay out special dividends to adjust their high capital buffers.
  • For sector exposure, we continue to prefer OCBC (SGX:O39). OCBC is expected to benefit more from improving market conditions with its wealth-management and insurance franchises.
  • See
  • See report attached below for complete analysis.

Terence Chua Phillip Securities Research | https://www.stocksbnb.com/ 2021-06-07