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Singapore Banks Summary

Core Content

This document provides an analysis of the performance and outlook for Singapore banks in early 2014, with a focus on loan growth, deposit trends, and investment recommendations. It highlights the key drivers and challenges affecting the banking sector, including the impact of global economic conditions, interest rate expectations, and the performance of different loan segments.

Main Points

• Loan Growth in January 2014:

  • Industry DBU loans grew by 16.5% YoY, driven by business loan growth of 22.5% YoY.
  • Housing loans grew at a five-year low of 8.6% YoY, contributing to a slowdown in consumer loan growth.
  • Consumer loans accounted for 38.8% of total DBU loans, with housing loans making up 74.1% of consumer loans and car loans decreasing by 16.0% YoY.
  • Business loans accounted for 61.2% of total DBU loans, with general commerce loans growing by 31.0% YoY and financial institutions loans growing by 18.9% YoY.

• Deposit Trends:

  • Industry SGD deposits grew by 2.9% YoY, the slowest since February 2005.
  • DBU loan-to-deposit ratio (LDR) was 83.6% in January 2014, with the system-wide DBU LDR at 107.2%, the highest since June 1998.
  • Net deposit deficit stood at SGD39.0b, indicating tight system liquidity.

• Interest Rates and NIM:

  • 3M Singapore dollar SIBOR is expected to remain unchanged in 2014 and rise to 1.0% by end-2015 and 2.0% by end-2016.
  • Net interest margin (NIM) is closely correlated with short-term interest rates and is expected to stay depressed in 2014, with a potential recovery in 2015.
  • The industry NIM is projected to remain below the 16-year average over the next three years.

• Investment Recommendation:

  • Maintain Overweight on Singapore banks, with DBS as the top sector pick.
  • OCBC is advised to be cautious due to uncertainty over its proposed bid for Wing Hang Bank.
  • UOB is also recommended as a "BUY" due to its disciplined management and focus on liquidity.

Key Information

• Business loan growth is expected to remain 12-14% in 2014-2015, with general commerce as a potential wild card.
• Building and construction loans are projected to grow at 10% in 2014, but may slow further due to a high base factor.
• SGD deposit growth is expected to remain lethargic, with interest rates being a key factor in loan growth outpacing deposit growth.
• DBS has the most liquid Singapore dollar balance sheet with an SGD LDR of 75%, implying a net deposit surplus of SGD33.3b.
• OCBC has a more volatile earnings profile due to its 87%-owned Great Eastern Holdings.

Peer Comparison Table

Investment Thesis

Valuation Summary

Key Trends and Charts

• DBU loan growth remained strong in 2013, supported by business loan expansion.
• Consumer loan growth slowed, with housing loans being the largest contributor and car loans shrinking.
• SGD deposit growth was the slowest in nearly nine years, with depressed interest rates affecting cash holding.
• DBU LDR hit a record high of 107.2%, indicating tight liquidity.
• SGD LDR was still comfortable at 83.6%, despite loan growth outpacing deposit growth.
• NIM is expected to bottom out in 2014, with a potential recovery in 2015.
• Net interest income is projected to grow for all banks, with DBS leading the way.

Summary of Key Ratios

Conclusion

The Singapore banking sector is facing a mix of challenges and opportunities in 2014, with business loans being a key growth driver and housing loans experiencing a slowdown. DBS is highlighted as the best-positioned bank to benefit from a rising interest rate environment, while OCBC faces uncertainty due to its proposed bid for Wing Hang Bank. UOB is also recommended with a focus on liquidity management and disciplined operations. The sector's NIM is expected to remain depressed in 2014, with a potential recovery in 2015. The valuation metrics indicate DBS as the most attractive investment option.