Singapore Banks

CIMB Research, Feb 18

IN descending order of Q4 2013 results that exceeded expectations, UOB stacks up on top, followed by OCBC and lastly, DBS. Common trends in Q4 were better margins (despite the fixed deposit competition), trade finance-driven loan growth, seasonally softer treasury earnings and no asset quality weakness.

The main differentiator in Q4 was fee income, of which UOB had the most impressive showing. Post results, we have raised UOB ahead of DBS as our sector top pick and upgraded OCBC from "reduce" to "add", primarily on its recent share price underperformance. Our sector rating stays at "overweight".

Q4 is typically slower, so a slowdown in treasury contributions and fee income was anticipated. Seasonal effects aside, these positives stood out in Q4 2013: 1) all three banks delivering either flat or rising margins, even in the face of time deposit competition; 2) loan growth driven by external trade finance flows, and guidance by the respective banks' management that this could broaden if China's liquidity tightens; and 3) a surprising improvement in NPL (non-performing loan) ratios, after some deterioration in Q2 2013.

We believe Singapore banks are natural hiding places amid emerging market jitters. Even as the three banks crystal-balled 10-15 per cent fall in local property prices, investors' fears were noticeably less on potential mortgage bad debt. Instead, the main concerns in Q4 clearly gravitated to: 1) the type of China exposure the banks were getting themselves into, and 2) liquidity and funding cost pressures ahead. For two of the banks, the Greater China exposure is clearly rising, but both have explained that it is almost solely driven by short- term trade loans. They also see no funding cost pressure from the US-dollar commercial paper market, even if they are cognisant of the deposit funding squeeze ahead.

Why is UOB top pick? 1) We are impressed with its revenue growth in a slow quarter, particularly from its fee income engines. UOB attributed this to deep efforts to integrate systems across the region and believes its fee growth can be sustained. 2) If the intermittent newsflow of imploding China trust funds piles up negative sentiments on China, UOB will be deemed the most defensive, as it has the lowest Greater China exposure and a constant eye on liquidity. 3) After proving that it as a strong deposit franchise via a quarter of sturdy current account- savings account (Casa) deposits collection, we think that concerns about its lower proportion of Casa will dissipate.

Sector - OVERWEIGHT