ComfortDelgro

OCBC on 7 Sept 2015

Singapore’s Transport Minister announced on 3 Aug a potential reduction in bus and train fares by up to 1.9% effective end-FY15 for a one-year period to reflect the lower energy costs. Certainly, the fare cut will have negative impact on ComfortDelGro’s (CDG) near-term growth, at least in FY16, mainly through its ~75% exposure in SBS Transit (i.e. bus operations in Singapore) and as the operator for Downtown Line (DTL) in Singapore. However, the potential fare cut will have marginal impact on CDG as a group due to its diversified revenue generated across multiple geographical locations. Without any further concrete details, we prefer to conservatively incorporate worst-case scenario assumptions (i.e. 1.9% fare cut) and reduce our FY16F PATMI forecast by 2%. Consequently, our DDM-derived FV drops from S$3.07 to S$2.99. Maintain HOLD as we still like CDG for its stability and diversified revenue stream.

Potential fare cut in Singapore effective end-FY15
Singapore’s Transport Minister announced on 3 Aug a potential reduction in bus and train fares by up to 1.9% effective end-FY15 for a one-year period to reflect the lower energy costs. We highlight that this announcement of fare reduction by year-end came as a surprise to us, especially when the most recent fare hike of 2.8% only came into effect Apr 15. Certainly, the fare cut will have negative impact on ComfortDelGro’s (CDG) near-term growth, at least in FY16, mainly through its ~75% exposure in SBS Transit (i.e. bus operations in Singapore) and as the operator for Downtown Line (DTL) in Singapore. With the transition to the new bus government contracting model (GCM) to commence 2H16, any fare adjustment thereafter will not impact revenue contribution from Singapore bus operations since revenue risk will be passed on to LTA.

Minimal impact given diversified revenue base
In our view, the potential fare cut will have marginal impact on CDG as a group due to its diversified revenue generated across multiple geographical locations. Based on FY14 financials, CDG derived ~59% of its total revenue from Singapore. However, we estimate revenue contributions from rail and bus operations in Singapore only made up ~5% and 15-20% of CDG’s total revenue in FY14 respectively. Furthermore, with GCM to commence from 2H16, the fare cut will have no impact to CDG’s bus revenue contribution since LTA keeps all bus revenue collected while paying CDG a negotiated annual fee for operating public buses. With DTL phase 2 (DTL) slated to commence operations by year-end, a 1.9% fare reduction in FY16 will certainly be negative but unlikely to be significant for CDG.

Slightly lower FV; maintain HOLD
Without any further concrete details, we prefer to conservatively incorporate worst-case scenario assumptions (i.e. 1.9% fare cut) and reduce our FY16F PATMI forecast by 2%. Consequently, our DDM-derived FV drops slightly from S$3.07 to S$2.99. Maintain HOLD as we still like CDG for its stability and diversified revenue stream.

OCBC

Kim Eng on 30 Apr 2015

• Beats from overheads, allowances, customer treasury flows & Bank of Ningbo masked weak trends. 
• NIM disappointed, down 5bps QoQ & 8bps YoY to 1.62% trough. Weak loan traction. 
• Maintain HOLD for lack of catalysts & SGD11.10 TP, at 11x FY15 P/E. Top sector pick DBS. 

Strong PATMI…
1Q15 PATMI of SGD993.1m beat the market’s SGD911m and our SGD881.8m. Variances were: 1) lower-than-expected overheads of SGD873m vs our SGD960m on lower business-promotion and volume-driven expenses; 2) stronger-than-expected net trading income. This was primarily treasury-related income from customer flows; 3) smaller-than-expected allowances of SGD64m vs our SGD100m; and 4) strong contributions from Bank of Ningbo.

…but weak trends
Loan growth of 0.2% QoQ and 4% YoY, ex-Wing Hang, was softer than expected. SGD/USD loans were down 1.2% and 5.2% QoQ, partially offsetting a sharp 10.2% QoQ jump in HKD loans. Contrary to expectations, NIM contracted 5bps QoQ and 8bps YoY to a trough of 1.62%. This was due to aggressive HKD depositgathering and weaker income from money-market gapping. A large increase in fixed deposits pushed up cost of funds by 4bps QoQ, diluted improved SGD loan spreads. Like its peers, asset quality stayed strong.

Reiterate HOLD We leave our EPS unchanged pending our sector review. Reiterate HOLD with a SGD11.10 TP, at 11x FY15 P/E. This is more than 1SD below its rolling average since 2005

Oversea-Chinese Banking Corporation

UOBKayhian on 4 May 2015

FY15F PE (x): 12.0
FY16F PE (x): 11.2

Oversea-Chinese Banking Corporation (OCBC) reported net profit of S$993m for 1Q15, a whisker away from the S$1b mark. Muted loan growth. Loans expanded marginally by 0.2% qoq. Greater China (+2.8% qoq) and Indonesia (+1.3% qoq) provided some growth on a sequential basis but there was a slight contraction from Singapore (-0.1% qoq). Trade loans contracted 12% qoq while US$ loans declined 5.2% qoq. Maintain BUY. Our target price of S$12.58 is based on P/B of 1.56x, derived from Gordon Growth Model (ROE: 11.3%, required return: 7.8% and growth: 1.5%)

Oversea-Chinese Banking Corp

UOBKayhian on 12 Feb 2015

FY15F PE (x): 12.1
FY16F PE (x): 10.9

OCBC reported net profit of S$791m for 4Q14, which is below our forecast of S$909m. Re-positioning OCBC Wing Hang. OCBC will utilise its onshore-offshore strategy to engage customers onshore in China to service their offshore needs in trade and investment. It plans to capture flows in trade, capital and wealth due to the increased connectivity between Greater China and Southeast Asia. The acquisition of OCBC Wing Hang has also strengthened funding for international currencies, such as US dollar and the renminbi. US dollar is commonly used for cross-border transactions while the renminbi. is increasing accepted for trade settlement. Maintain BUY. We roll over our valuation to 2015. Our target price of S$12.65 is based on1.59x P/B, derived from Gordon Growth Model (ROE: 11.5%, required return: 7.8% and growth: 1.5%). 

Singapore Banks

Kim Eng on 19 Jan 2015

• Household sector poses no threat
• Household balance sheets solid. Leverage comfortable. Cash & cash equivalents exceeding debt.
• Values of homes, shares & securities would need to halve for peak leverage to return. Remote.
• Maintain OVERWEIGHT with earnings deliveries as short-term catalysts. DBS our top pick, followed by UOB.

Bright spots…
Household wealth hit a new record of SGD1,454.7b (+1.4% YoY) or SGD266,000 per capita in Sep 2014. QoQ, it contracted 0.2%, on lower values of homes, shares and securities. While higher, household leverage remained a comfortable 16.6%. Household financial liquid assets, comprising cash & deposits and shares & securities, were up 4.4% YoY to SGD513.0b, topping household debt of SGD290.3b.

… and safety nets
Based on our estimates, the combined value of homes, shares and securities would need to halve for household leverage to revisit its previous peak of 21.1%. With the labour market expected to remain tight, consumer loan quality is unlikely to deteriorate much, in our assessment. Furthermore, macro-prudential measures targeting housing, car and unsecured personal loans should provide some protection against soaring interest rates and weaker economic prospects.

Maintain OVERWEIGHT. We expect banks to be re-rated further, from continued earnings deliveries. Waning interest in the oil & gas sector could also benefit them through sector rotations.  DBS is our first choice, followed by UOB. Remain cautious on OCBC over its Wing Hang Bank integration risks.

Singapore Banks

Kim Eng on 9 Dec 2014

• 10% MYR depreciation vs SGD could hurt EPS by as much as 2.3%. OCBC’s the most. DBS’s the least.
• USD appreciation to cushion MYR weakness.
• Maintain OVERWEIGHT with catalysts from further earnings deliveries. DBS still our top pick, followed by UOB. Remain cautious on OCBC.

MYR weakness against SGD
Since end-September, regional currencies have weakened against USD. SGD is no exception. Still, SGD has held up better than others. Amid a weakening MYR vs SGD and with Malaysia being the largest overseas market for OCBC at 26% of FY13 PBT and UOB at 15%, this is negative. DBS has negligible exposure to Malaysia.

What if MYR depreciates by 10%?
MYR could remain under pressure in 2015 as Malaysia’s economy is weighed down by low commodity prices and GST starting 1 Apr 2015. However, we estimate a 10% depreciation against SGD would only lop off less than 3% of banks’ earnings, ceteris paribus. OCBC will be slightly more affected by lower translated profits in SGD terms. However, this could be compensated by a USD which has gained 3.6% against SGD since end-September. All three banks are net beneficiaries of a rallying USD given their USD lending, paced by DBS at 35% of its loans. OCBC is next with 27% and UOB, 16%. In sum, we think recent currency volatility would be too mild to deflect 4Q14 results.

Maintain OVERWEIGHT. We expect the sector’s re-rating to continue in 2015 on further earnings deliveries. On top of that, waning interest in the oil & gas sector may benefit banks, through sector rotations. DBS is our first choice, followed by UOB. We remain cautious on OCBC over its ability to extract synergies from Wing Hang Bank.

Singapore Banks

Kim Eng on 18 Nov 2014

• EPS growth prospects plus potential fund inflows from oil & gas sector. Raise EPS by up to 10% and TPs.
• UOB could be re-rated further after management assurances. Weaker liquidity profile well-cited. Upgrade to BUY from HOLD.
• Upgrade sector to OVERWEIGHT from Neutral. DBS our top pick, followed by UOB. Still cautious on OCBC.

Sector raised to OVERWEIGHT
We believe a sector re-rating is afoot after three quarters of positive earnings surprises, from strengthening NIMs and asset resilience. Earlier wariness over China exposures proved unfounded. As the oil & gas sector’s outlook dims, we expect banks to benefit from fund reallocations, given a dearth of catalysts for the other major sectors. Higher interest rates starting mid-2015 should provide another source of catalysts. These are behind our sector upgrade to OVERWEIGHT from Neutral.
Upgrade UOB to BUY; DBS still top pick
We believe the market has priced in UOB’s less-favourable funding profile. We cut its NIMs as it is not that well-positioned for higher rates. Still, we anticipate catalysts from stronger deposit growth and improving housing-loan quality. DBS remains our top pick as it should be best-positioned to benefit from rising rates. We stay cautious on OCBC.
Raising TPs and EPS. We raise FY14E-16E EPS by up to 10%, for better NIMs and non-interest income. We also incorporate Wing Hang Bank for OCBC. We bump up TPs for all three, without changes to our valuation methodologies.

OCBC

Kim Eng on 31 Oct 2014

• No surprises. NIM weaker but expected. Credit quality strong. Ample 80.2% SGD LDR, with decent loan growth.
• The extraction of synergies from WHB remains an uncertainty.
• Maintain HOLD & SGD10.10 TP, at 1.24x FY15E P/BV. Top sector pick DBS.

No surprises
3Q14 results broadly met our expectation, stripping out SGD38m contributions from OCBC Wing Hang and a one-off gain of SGD391m from Bank of Ningbo. Core PATMI, excluding OCBC Wing Hang, was SGD803m, up 5.8% YoY but down 12.8% QoQ. The QoQ weakness arose from lower life-insurance profits and a higher effective tax rate.

Operating trends within guidance
As expected, NIM was weaker at 1.68%, down 2bps QoQ though up 5bps YoY. Management earlier guided for a weaker 2H14 due to deposit competition. Evidently, cost of funds rose to 1.10% (+6bps
QoQ, +8bps YoY). Organic loans grew 1% QoQ and 11% YoY, powered by Greater China (+3%, +19%), Malaysia (+3%, +18%) and Indonesia  (+2%, +15%). There were no asset-quality issues with a marginal increase in absolute NPLs. Asset quality in Greater China remained sound, with an NPL ratio of 0.3% at end-September. Post-merger CET1 was comfortably high at 13.2% (Jun 2014: 14.7%, Mar 2014: 14.4%). SGD liquidity remained strong with an 80.2% LDR (Jun 2014: 81.6%, Mar 2014: 78.8%, Dec 2013: 80.3%).

Reiterate HOLD
We leave our forecasts unchanged pending our sector review. Reiterate HOLD with a SGD10.10 TP, at 1.24x P/BV, 1SD below its mean since 2005.

Singapore Banks

Kim Eng on 27 Oct 2014

• Property market could get worse. Net supply to inundate market as population growth slows & interest rates rise.
• But banks are unfazed; see no threat of 20% price falls next year.
• Banks also have some protection. Neutral on sector. DBS our top pick.

Property market not a pretty sight
As a follow-up to our note on 15 Sep, we delve deeper into Singapore’s property market to answer clients’ questions on broad property trends. First, vacancy rates for non-landed private homes, excluding ECs, have risen to 8.3%, their highest in eight years. Second, current seemingly-high rental yield spreads could reverse when interest rates start to rise in 2015. A massive supply of new homes — 63,000, of which 6,038 unsold — could tip the balance in 2015 as household formation tapers off. To absorb the supply, property prices and rentals will have to weaken, a consensus view. Our house forecasts up to a 15% decline in home prices from mid-2014 to end-2015.

But higher foreign purchases not a risk
Foreign investors have been snapping up Singapore homes, accounting for 13.8% of all purchases in 1Q05-4Q11. PRC Chinese and Malaysian buyers are the two largest groups, behind 28% and 26% of 2013’s purchases. High foreign purchases may seem a risk but we believe some protection is offered by lower LTV ratios for these buyers. Singapore’s improved position as one of the international wealth-management centres may also suggest some of these are long-term investments. Default cases at luxury projects are not reflective of the broader market, in our view. Banks tell us they are not concerned and expect a minimal earnings impact.

Neutral unchanged, DBS still our top pick
We still expect the banking sector to escape largely unscathed. That said, sector remains a Neutral, for lack of catalysts. DBS remains our top pick, as it should be best positioned to benefit from rising rates. We stay cautious on OCBC.

Singapore Banks

Kim Eng on 1 Sept 2014

• Industry DBU loan growth slowed to 10.8% YoY in July, on slowing business (+14.1%) and housing loan growth (+7.0%).
• SGD deposit growth (+0.7% MoM, +0.1% YoY) remained paltry. SGD LDR improved a tad to 86.5%.
• Remain Neutral on banks. DBS our top sector pick.

Loan growth continued to lose steam
Industry domestic banking unit (DBU) loans grew a slower 10.8% YoY in July, particularly for business loans (+14.1%). Lending for general commerce (+18.8% YoY) and to financial institutions (+23.4%) continued to anchor DBU loans. Property weakness continued to drag down consumer loan growth (+6.0% YoY), to its slowest in seven years. The domestic loan-growth slowdown may manifest itself in Singapore banks’ loan data for 3Q14. However, the impact should be cushioned by stronger loan demand from Greater China, which has been gaining in importance.
SGD LDR could rise further
SGD deposits rose just 0.7% MoM or 0.1% YoY in July. Holding cash remains unappealing when interest rates are so depressed. As a result, SGD LDR continued to hover around to 86.5%, a level we are still comfortable with. But with deposit growth expected to remain sluggish, SGD LDR could rise further.
We expect industry loan growth to slow to 9-10% in 2014-15. Housing loans should expand just 4-6%, in tandem with a slowing property market. However, we believe its slack will be picked up by reasonably strong business loan growth of 12-14%. Lending for general commerce could prove to be the wild card.
For exposure, DBS is our top sector pick (BUY, TP SGD23.40). It should be best positioned to take advantage of an eventual rise in interest rates.

Singapore Property

OCBC on 21 Aug 2014

Over the last week, the authorities highlighted their various plans to transform the Jurong Lake District into a key regional center and also announced a new Thomson-East Coast line (TEL) that will connect neighborhoods along the East Coast stretch to the MRT grid. We believe that these initiatives to further enhance the outer regions in terms of infrastructure and mix of use will underpin the long-term attractiveness and potential for appreciation of real estate in Singapore. In particular, we see the transformation of the Jurong Lake District to be positive for CapitaLand and CapitaMall Trust, which operates three large retail malls (IMM, J-Cube and Westgate) in the area with a combined retail NLA of 1.0m sq ft. We also highlight that UOL’s Seventy St. Patrick’s condominium project (~186 units), located near the upcoming Marine Terrace MRT station, is ready for launch and could benefit from the TEL announcement. We have BUY ratings on CapitaMall Trust and CapitaLand with fair value estimates of S$2.20 and S$3.79, respectively. We also have a BUY rating on UOL with a fair value estimate of S$6.95.

The transformation of the Jurong Lake District
During the National Day Rally last Sunday, PM Lee highlighted the Jurong Lake District as an area in Singapore which he planned to further transform. The new Jurong Lake Gardens will be formed by integrating the Chinese and Jurong Gardens and Jurong Lake Park, with an area size of more than 70 ha. The Jurong Lake District neighborhood will also see enhancements with the addition of more developments, such as a new Science Centre, which will be located near Chinese Garden MRT and expected to be ready by 2020. We believe the transformation of the Jurong Lake District will be positive for developers with real estate exposure in the area. In particular, we highlight that CapitaLand and CapitaMall Trust operates three large retail malls (IMM, J-Cube and Westgate) in the area. Together, these assets comprise a whopping 1.0m sq ft of operational retail net leasable area, and we believe the group finds significant synergies in positioning these three assets as a “3-in-1” retail proposition that caters for a wide range of shoppers in Singapore’s largest regional hub. We have BUY ratings on CapitaMall Trust and CapitaLand with fair value estimates of S$2.20 and S$3.79, respectively.

Improving MRT connectivity in the East Coast
The authorities also recently announced a new Thomson-East Coast line (TEL) that will connect the East Coast stretch to the MRT grid and significantly reduce travel times to the town area. We believe that the announcement of the TEL could trigger interest for residential assets in the area and would be beneficial to developers with projects ready for launch near the upcoming MRT stations. One potential beneficiary is CapitaLand’s upcoming Marine Blue project (~124 units; acquired for S$100.7m or S$1,056 psf GFA in 2011), which is near the planned Marine Parade MRT. UOL’s Seventy St. Patrick’s condominium project (~186 units), located near the upcoming Marine Terrace MRT station, is also ready for launch. UOL’s site was acquired through an en-bloc process for S$172m in Jul-12 and we estimate break even prices around S$1,250 psf. We have a BUY rating on UOL with a fair value estimate of S$6.95.

OCBC Bank

Kim Eng on 19 Aug 2014

• On paper, Greater China strategic initiatives look good, with revenue synergies from day one.
• Execution is critical. May prove harder than expected. Scrip dividends likely to stay, lifting CET1 higher.
• Maintain HOLD and TP of SGD10.10 (1.24x FY15E P/BV). Top sector pick is DBS.

Upbeat management but execution is key
Management painted sanguine prospects in yesterday’s briefing on the bank’s rights issue to finance its acquisition of Wing Hang Bank (WHB). There are revenue synergies by leveraging WHB’s presence in the Pearl River Delta and cross-selling each other’s specialised products. A larger platform in Greater China should help OCBC capture trade and investment flows in the region, capitalise on rising affluence in Greater China and build a stronger deposit base in USD and CNY.
4% EPS and 0.4ppt ROE dilution

We estimate the rights (SGD3.3b at SGD7.65 apiece) will dilute our FY15E/16E EPS by up to 4%, translating into ROE dilution of 0.4ppt for both years. The rights issue would restore OCBC’s transitional common equity Tier 1 (CET1) to 13.2% vs DBS’s 13.5% and UOB’s 13.9%. Its scrip dividend scheme will remain a key feature for raising CET1 higher. We have yet to factor in WHB’s financials. On a pro-forma basis, our TP is unlikely to change much.

Not taking a leap of faith; maintain HOLD
We maintain our HOLD rating on OCBC and TP of SGD10.10, based on 1.24x FY15E P/BV. This is 1SD below its average P/BV since 2005 to factor in M&A risks. As with most M&As, execution could prove trickier than initially expected. In our view, any concrete results are only likely to emerge in 2H15E, at the earliest. Management expects the acquisition to turn accretive three years from now.

OCBC

Kim Eng on 5 Aug 2014

• 2Q14 beat expectations on strong net trading income and profit from life assurance.
• NIM held up well, solid credit quality, ample SGD liquidity (81.6% SGD LDR), though loan growth slowed.
• Purchase of WHB remains a concern. Maintain HOLD and TP of SGD9.63, based on 1.24x average FY14E-15E P/BV. Top sector pick is DBS.

Ahead of market and our expectations…
2Q core PATMI of SGD921m (+6.2% QoQ, +54.3% YoY) took 1H14 core PATMI to SGD1.79b (+38.3%). This formed 59% of our FY14E forecast. The positive surprise came from net trading income (better customer flows), profit from life assurance of SGD220m (1Q14: SGD183m, 2Q13: SGD16m) and a better NIM. Better life insurance profit was fuelled by higher marked-to-market gains on favourable interest rates and tighter credit spreads.

… though nothing out of the ordinary
Like DBS, OCBC’s NIM held up well, at 1.70% (flat QoQ, +6bps YoY), with better asset yields (+2bps QoQ, +8bps YoY). This cushioned higher cost of funds (+2bps QoQ, +1bp YoY). Loan growth slowed to 1.2% QoQ or 11.7% YoY (1Q14: +3.3%, +18.1%), due to weaker demand for trade loans. Mirroring its peers, OCBC’s SGD deposits contracted 1.6% QoQ, taking its SGD LDR to 81.6% (DBS: 76.6%, UOB: 100.1%). Asset quality was resilient, with housing NPLs staying at SGD253m QoQ.

Reiterate HOLD; WHB purchase an overhang
We leave our forecasts unchanged for now pending our sector review. Its purchase of Wing Hang Bank (WHB) remains an overhang. While cheap, we believe its share-price weakness will persist. Reiterate HOLD with a TP of SGD9.63, based on 1.24x average FY14E and FY15E P/BV.

Oversea-Chinese Banking Corp

UOBKayhian on 30 Jul 2014

FY14F PE (x): 10.7
FY15F PE (x): 10.2
The offer for Wing Hang Bank has closed and OCBC has successfully garnered a controlling 97.52% stake. This is a favourable outcome as the risk of having to sell down to a 75% stake to maintain free float of at least 25% did not materialise. Overhang on OCBC’s share price would be removed once management discloses the structure of its equity fund-raising exercise. Maintain BUY. Ttarget price: S$11.14.

OCBC Bank

Kim Eng on 10 Jul 2014

• With Elliott Capital Advisors in the picture, the privatisation bid for Wing Hang Bank looks challenging.
• A higher offer price for WHB would be negative; we think OCBC is likely to keep its stake at 75% before embarking on its second privatisation bid for WHB a year from now.
• Negative view reinforced; reiterate HOLD.

Possible scenarios for WHB acquisition
The move by Elliott Capital Advisors to accumulate up to 7.8% stake in Wing Hang Bank (WHB) could throw a spanner on OCBC's bid to take WHB private, which requires at least 90% acceptances.
In our view, the two possible outcomes are:

Outcome #1: OCBC receives less than 90% acceptances but more than 75%. OCBC is required to sell anything in excess of 75% as per the listing requirement that stipulates a minimum 25% free float.
We expect WHB's share price to collapse to HKD83 (1.2x P/BV), its last traded price before the M&A excitement emerged. This represents a 33.6% downside from the offer price of HKD125. OCBC could incur losses as much as SGD311m, equivalent to 1.4% of its core equity Tier 1. From a P&L standpoint, the impact is modest but it could reduce management flexibility.

Outcome #2: Under a worse-case scenario, OCBC raises the offer price such that WHB can be taken private. In our view, this is an unlikely outcome as it could put management's credibility at risk.
Already, the share price of OCBC has suffered and the earlier guidance of EPS and ROE accretion by FY17E could be pushed back. We think OCBC is more likely to keep its shareholding at 75% before embarking on its second privatisation bid a year later. This saga reinforces our negative view on the stock Our SGD9.63 TP is based on 1.24x FY14E P/BV, equivalent to 1SD below its historical P/BV average since Jan 2005.

Singapore Banks

CIMB Research, June 30

MAS banking data for May showed healthy YTD domestic banking unit (DBU) loan growth of 4.1 per cent (April: 2.9 per cent), broadly in line with the banks' guidance of high single-digit to low-teens loan growth for the full year.

The 1.1 per cent month-on-month loan growth was led by business loans (plus 1.6 per cent m-o-m, plus 6.3 per cent YTD), building and construction loans (plus 1.1 per cent m-o-m, plus 3.1 per cent YTD) and mortgages (plus 0.7 per cent m-o-m, plus 2.5 per cent YTD). Meanwhile, consumer loans shrank 0.2 per cent m-o-m and 0.2 per cent YTD as demand for car loans and share financing continue to fall.

A worrying trend in May is that DBU deposits shrank (minus 0.8 per cent m-o-m, minus 0.2 per cent YTD), led by an outflow of fixed deposits. We have to go back to as far as March 2003 (Sars) to find a y-o-y decline in system deposits.

As loan growth continues to outpace deposit growth, DBU loan-deposit ratio is up (May:111 per cent, April:109 per cent), so is Sing dollar loan-deposit ratio (May:84 per cent, April: 83 per cent).

A shrinking deposit pool is worrying as banks will have to compete aggressively for a shrinking pie, hiking up funding costs for all.

The concern is accentuated with the new liquidty coverage ratio requirements, especially for the foreign banks who need to offer attractive rates to compete. If higher rates merely poached fixed deposits from the local banks, it would not be a worry.

However, recent current and savings (CASA) account packages suggest that the local banks are equally wary of CASA slippage.

We maintain our "overweight" call on the sector as the banks seem to be able to pass out higher funding costs to loans. DBS is our top pick, as its large CASA base (2.5 and 2.75 times that of UOB and DBS respectively) will allow it to remain relatively sheltered from impending deposit competition.

OVERWEIGHT

Singapore Banks

Kim Eng on 1 Jul 2014

•  Industry DBU loans slowed to 13.0% YoY in May, supported by business loan growth of 17.4%. But housing loan growth hovered at a seven-year low of 7.6%.
• Industry SGD deposits shrank 0.7% YoY, its first contraction since Mar 2003. SGD loan-to-deposit ratio continued to climb but still at a comfortable 86.9% in May.
• Maintain Overweight on Singapore banks with DBS our top sector pick. Shun OCBC given the uncertainty over its proposed bid for Wing Hang Bank.

May loan data supported by business loans
Business loan growth of 17.4% YoY in May continued to be the main pillar of support for industry domestic banking unit (DBU) loans (+13.0%) for the month. General commerce loans (+25.2% YoY) remained the key business loan driver. However, the general trend was dampened by a persistently weak housing loan growth of 7.6%, its slowest in almost seven years.

SGD LDR inching up but still comfortable
The industry SGD deposits shrank by 0.7% YoY in May, its first contraction since Mar 2003. The current depressed interest rates make holding cash unappealing. Although the SGD loan-to-deposit ratio (LDR) has been inching up, we are still comfortable with May’s figure of 86.9%. With deposit growth expected to remain lethargic, SGD LDR looks set to rise further in 2014. We expect industry loan growth to slow to 9-10% in 2014-2015, with housing loans rising 4-6% in tandem with a slowing property market. However, we believe the shortfall would be compensated by a reasonably strong business loan growth of 12-14%. Lending to the general commerce sector could prove to be the wild card. For exposure, DBS is our top sector pick as it is the best positioned to take advantage of a rising interest rate environment. We would stay cautious towards OCBC.

Singapore banks

Maybank Kim Eng Research, June 11

UOB benefits from woes affecting peers. Contrary to market expectations, UOB's share price continued to outperform even after posting the weakest Q1 2014 results among the three banks we cover.

YTD, UOB's share price has risen by 7.1 per cent which compares favourably to that of DBS (-0.1 per cent) and OCBC (-4.3 per cent) and the benchmark Straits Times Index (+4.2 per cent).

In our view, UOB's share-price outperformance can be attributed to:

- Reduced appetite for a more aggressive OCBC. The execution risk related to the acquisition of Wing Hang Bank has made investors turn cautious toward OCBC. This has put UOB in a positive light, reinforcing the perception of it being a safer investment bet.

- Smallest exposure to Greater China. The market's discomfort over significant Greater China exposure has reduced the investment appeal of DBS given its largest exposure to that region.

In our view, UOB's share-price outperformance is unlikely to reverse for the rest of this year because:

- UOB's relative P/BV valuation to DBS and OCBC remains modest from a historical standpoint.

- In the case of OCBC, management's allusion that Wing Hang Bank is a long-term acquisition suggests it would be sometime before the market recognises the benefits of the acquisition. Until then, we expect the overhang to remain.

- With Greater China being a key driver of DBS's prospective earnings, lingering concerns over shadow banking and the spectre of a weaker economy in China, DBS's share price may struggle in H2 2014 until there are clearer signs that short-term interest rates are on the rise.

However, UOB's outperformance could reverse when there are clear signs that short-term interest rates are on the rise. This is because among the three Singapore banks UOB has the weakest deposit franchise. We do not expect higher interest rates until mid-2015.

As H2 2014 approaches, we now roll over our valuation base year to mid-2015.

To derive the mid-2015 earnings, we use the average earnings for FY14E and FY15E.

With the exception of DBS, the fair value multiples assigned to UOB and OCBC are left unchanged.

In the case of DBS, we now ascribe a lower fair P/E multiple of 13 times (from 14 times) to reflect potential risks owing to its greater dependence on Greater China.

At 13 times P/E, DBS is priced at its rolling P/E mean since May 2005. Our revised TPs are:

- $20.70 for DBS (previously: $20.30),

- $25.70 for UOB (previously: $24.30), and

- $9.63 for OCBC (previously: $9.22).

We reiterate our "overweight" stance on the banks sector.

DBS is our top pick as it is best positioned to take advantage of a rising interest rate environment. UOB is our second choice. We would stay cautious on OCBC.

SECTOR - OVERWEIGHT

Singapore Banks

Kim Eng on 3 june 2014

• Latest data for 1Q14 reflects solid household balance sheets that are able to withstand tremendous stress.
• It would take a 40% plunge in the combined valuation of homes, shares and securities for household leverage to revisit historical peak.
• Maintain Overweight on banks. DBS remains our top sector pick, followed by UOB. Stay cautious on OCBC.

Strong household balance sheets
The official data for the quarter ended 31 March 2014 suggests solid household (HH) balance sheets, characterised by record HH wealth, comfortably low HH leverage (HH debt accounts for 16.3% of HH assets) and a more cashed-up HH sector with cash hoard (ex-CPF contributions and pension funds) in excess of debt.

As safe as a house
Based on our estimates, it would take a 40% plunge in the combined valuation of homes, shares and securities for household leverage to revisit its record high of 21.1%. This suggests the underlying strength of household balance sheets, providing significant safety nets for Singapore banks in the event of an economic fallout. The proactive steps taken by the authorities since Sep 2009 to curb residential property speculation should also help to contain any potential slippage on the housing loan front.
Maintain Overweight on banks. For exposure, DBS is our top pick as it is best positioned to take advantage of a rising interest rate environment. We would remain cautious towards OCBC.

Singapore Banks

Kim Eng on 20 May 2014

• SGD LDR has hit 83.4%, its highest in over a decade after four years of sagging industry SGD deposit growth vs loan growth.
• Liquidity is tighter but large local and foreign banks remain more than amply funded. DBS is best positioned for more intense competition, UOB less so.
• Maintain Overweight on banks. DBS remains our top sector pick, followed by UOB. Stay cautious on OCBC.

Slow deposit growth pushes LDR to 11-year high
Industry SGD deposit growth has slowed significantly in the past four years to 8.2% pa (vs 14.2% pa from 2005-2010), trailing behind industry SGD loan growth of 14.4% pa. As a result, industry SGD loan-to-deposit ratio (LDR) hit 83.4% at end-March, its highest in 11 years. With deposit growth likely to languish for the next 12 months as the depressed interest rate environment makes holding cash unappealing, fear of renewed competition for deposits sparking an increase in cost of funds has surfaced.

Competition stays but banks unlikely to overreact
We do not think Singapore banks will react rashly to competition. For one, system-wide SGD liquidity remains ample, with LDR at a comfortable 83.4%. Even assuming zero deposit growth, current industry excess SGD deposits of SGD91b can support two years of 8% pa industry loan growth before pushing LDR beyond 100%. Moreover, local banks, especially DBS and OCBC, are flush with liquidity with SGD LDRs of 73% and 79%, respectively. The large foreign banks such as Standard Chartered (76.1% LDR) and HSBC (73.2%) also enjoy ample liquidity for their Singapore operations. Lastly, Singapore banks have proven capable of raising substantial USD deposits (2013: +52.6%, 2012: +29.1%, 2011: +27.9%), allowing them to reduce reliance on SGD swaps to fund their USD lending.

Who stands to lose less if deposit competition intensifies? Of the three Singapore banks under our coverage, we believe DBS is best able to hold its ground should deposit competition intensify, given its extremely liquid balance sheet and a solid deposit franchise characterised by the highest proportion of cheap funding ratio. Between OCBC and UOB, we think the latter is more at risk.
Maintain Overweight on banks. For exposure, DBS is our top pick as it is best positioned to take advantage of a rising interest rate environment. We would remain cautious towards OCBC.