Singapore Banks

Kim Eng on 17 Feb 2014

Consistent and encouraging broad trends
Singapore banks’ earnings performance was a mixed bag in 4Q13 but the broad trends were unmistakably encouraging. First, all three banks under our coverage delivered sequentially higher net interest margin (NIM), led by UOB (+3bps). Second, credit quality stayed benign with no signs of asset quality stress. Third, loan growth came in stronger than expected (+18%) in 2013 with trade loans the main driver. Last but not least, SGD liquidity profile remained strong while USD loan-to-deposit ratio (LDR) improved to 102.3% (2012: 117.7%). The banks managed to chalk up an impressive 55.1% growth in their combined USD deposits in 2013, demonstrating their ability to raise substantial USD deposits in a short period.

Maintain Overweight
We may see a slower start to 2014, with share prices trading sideways in 1H before they start to react positively in 2H when signs of rising short-term rates, tipped to occur in mid-2015, emerge. In terms of valuation, Singapore banks are attractively priced at one standard deviation below their historical averages. We reiterate our Overweight call on the sector. DBS is our top sector pick. With interest rates poised to rise, it stands out as the clear-cut beneficiary given its most liquid SGD balance sheet and strongest deposit franchise. We remain cautious on OCBC despite the stock’s cheap valuation, as share price weakness may persist, with downside bias, amid uncertainty over the pricing and funding structure of its proposed purchase of Wing Hang Bank. Key risk to our call: OCBC walks away from the deal.