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Singapore Banks Summary

Core Content

• Loan Growth: In May 2014, the industry DBU loan growth slowed to 13.0% YoY, driven primarily by business loan growth of 17.4% YoY. Consumer loan growth was weaker, with housing loans growing at a seven-year low of 7.6% YoY and car loans declining by 19.7% YoY.
• Deposit Trends: Industry SGD deposits shrank by 0.7% YoY, marking the first contraction since March 2003. This is attributed to depressed interest rates making cash less appealing compared to property investments.
• Loan-to-Deposit Ratio (LDR): The industry SGD LDR remained at a comfortable 86.9% as of May 2014, despite the growing gap between loan and deposit growth. DBU LDR reached a record high of 111.4%, indicating a tight liquidity profile.
• Interest Rates and NIM: The 3M Singapore dollar SIBOR is projected to remain unchanged in 2014, rising to 1.0% by end-2015 and 2.0% by end-2016. A rise in short-term rates is expected to positively impact the Net Interest Margin (NIM), which is currently depressed and is projected to bottom out in 2014 before improving in 2015.
• Sector Outlook: DBS is the top sector pick due to its strong positioning for a rising interest rate environment. OCBC is advised to be cautious due to uncertainty around its bid for Wing Hang Bank and a more volatile earnings profile.

Key Trends and Insights

Loan Growth

• DBU Loans: Grew by 13.0% YoY in May 2014, supported by 17.4% YoY growth in business loans.
• Business Loans: Composed 61.7% of total DBU loans and were a key driver of loan growth.
• Housing Loans: Grew at 7.6% YoY, the slowest in seven years, due to weak property sales and a higher base.
• Consumer Loans: Accounted for 38.3% of total DBU loans, with housing loans making up 74.5% and car loans contributing 4.2%.
• Building and Construction Loans: Expected to grow around 10% in 2014, with continued support from large property development and infrastructure projects.

Deposit Trends

• SGD Deposits: Contracted by 0.7% YoY, the first contraction since March 2003, indicating a shift in investor behavior.
• Net Deposit Deficit: Reached SGD61.0 billion as of May 31, a significant shift from the SGD70 billion surplus before the 2008-2009 crisis.

Loan-to-Deposit Ratio

• System LDR: Reached a record high of 111.4% as of May 2014, indicating a tight liquidity environment.
• SGD LDR: Remained at 86.9%, comfortably low, but is expected to continue rising due to outpaced loan growth over deposit growth.

Peer Comparison

Investment Thesis

• DBS: Strong CEO leadership, significant presence in Greater China, and a key beneficiary of interest rate hikes. Risks include key personnel departures.
• UOB: Disciplined management, exposure to ASEAN markets, and strong liquidity management. Risks include political instability in Thailand.
• OCBC: High execution risk due to the Wing Hang Bank acquisition. More volatile earnings due to reliance on Great Eastern Holdings. Risks include prolonged capital market depression.

Valuation Summary

Key Financial Metrics

• Net Interest Income: Projected to grow for all banks, with DBS leading the growth trajectory.
• Fee Income: Expected to remain strong for DBS and UOB, while OCBC's fee income growth is more modest.
• Core Non-Interest Income: Shows a consistent trend for all banks, with DBS and UOB showing more stable growth.
• Core Operating Income: Expected to grow for all banks, with DBS and UOB showing more consistent performance.
• Overhead Expenses: All banks show a trend of increasing expenses, with DBS and UOB managing costs more effectively.
• Core Pre-Provision Profit: Projected to grow for all banks, with DBS leading.
• Provisions: All banks show a trend of increasing provisions, with DBS and UOB maintaining better coverage.
• Tier 1 Capital: DBS and UOB maintain strong capital ratios, while OCBC is slightly lower.
• Capital Adequacy Ratio (CAR): All banks show a decline in CAR, with DBS and UOB maintaining a more stable ratio.
• Average Lending Yields: DBS and UOB have higher yields compared to OCBC.
• Average Cost of Funds: DBS has a lower cost of funds, indicating better cost management.
• Interest Spread: UOB has the highest interest spread, while DBS and OCBC have more moderate spreads.
• Net Interest Margin (NIM): UOB has the highest NIM, followed by OCBC and DBS.

Conclusion

• The Singapore banks sector shows mixed trends, with strong business loan growth offsetting weak housing loan performance.
• The sector is advised to maintain an Overweight rating, with DBS as the top pick due to its strong position for interest rate hikes.
• OCBC is advised to be cautious due to uncertainties surrounding its proposed bid for Wing Hang Bank.
• The LDR is expected to continue rising due to the gap between loan and deposit growth.
• Valuation metrics suggest that DBS and UOB are more attractively valued compared to OCBC.
• The sector is expected to benefit from rising interest rates, which could significantly improve NIM and earnings.