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Singapore Banks Summary

Core Content Overview

This document provides an analysis of the performance and outlook for Singapore's banking sector, focusing on loan growth, deposit trends, interest rate expectations, and key financial metrics for major banks such as DBS, UOB, and OCBC. It also includes valuation metrics and investment theses for each bank, highlighting their strengths and risks.

Key Financial Trends

• Loan Growth:

  • Industry DBU loan growth slowed to 10.8% YoY in July 2014.
  • Business loans grew at 14.1% YoY, driven by lending to general commerce and financial institutions.
  • Consumer loans slowed to 6.0% YoY, the slowest in seven years, due to weak property market and declining car loan growth.
  • Housing loans grew at 7.0% YoY, close to their seven-year trough, with a large portion of DBU loans being USD trade loans.
  • Building and construction loans are expected to grow at 10% in 2014, with continued support from infrastructure projects.

• Deposit Growth:

  • SGD deposits grew 0.7% MoM and 0.1% YoY in July 2014, the first increase since March 2014.
  • Deposit growth is expected to remain weak in 2014 due to depressed interest rates.

• Loan-to-Deposit Ratio (LDR):

  • Industry DBU LDR dipped to 110.9% in July, indicating a net deposit deficit.
  • SGD LDR remained at 86.5%, comfortably low, with DBS having the most liquid balance sheet at 77%.

• Interest Rates:

  • 3M SGD SIBOR is expected to remain unchanged in 2014, then rise to 1.0% by end-2015 and 2.0% by end-2016.
  • A rise in short-term rates is expected to lift Net Interest Margin (NIM).

Investment Outlook

• Sector Recommendation: Remain neutral on the banking sector, with DBS as the top sector pick.

• DBS:

  • Target price: SGD23.40 (upside: 30.3%).
  • Investment thesis: Benefiting from higher interest rates, internationalization of CNY, and a strong presence in Greater China.
  • Risks: Unexpected departure of key personnel.
  • Catalysts: Consistent earnings and interest rate increases.

• UOB:

  • Target price: SGD25.30 (upside: 9.0%).
  • Investment thesis: Strong liquidity management, but weaker SGD funding profile.
  • Risks: Political turmoil in Thailand.
  • Catalysts: Sharp rise in interest rates.

• OCBC:

  • Target price: SGD10.10 (upside: 1.9%).
  • Investment thesis: Execution risks from the Wing Hang Bank acquisition, and volatile earnings from Great Eastern Holdings.
  • Risks: Failure to extract synergies, prolonged capital market depression.
  • Catalysts: Strong capital markets and interest rate increases.

Key Financial Metrics

Valuation Summary

Conclusion

The Singapore banking sector faces a slowdown in loan growth, particularly in consumer and housing loans, due to a weak property market and low interest rates. However, business loans and building and construction loans show potential for growth. DBS is highlighted as the top sector pick due to its strong position to benefit from interest rate increases and its solid financials. UOB and OCBC are more cautious picks with their own set of risks and catalysts. The overall outlook remains neutral, with the potential for NIM improvement as interest rates rise.