Singapore Banks

DBS on 6 Feb 2012

AFTER the strong loans growth of 8 per cent a quarter in Q2 2011 and Q3 2011, (9M11 YTD: 22 per cent), we expect loans growth to moderate in Q4 2011. With loans expected to expand 4 per cent q-o-q in Q4 2011, full-year 2011 loans growth should come in at 26 per cent, the highest since 2007's 22 per cent. Net income margin (NIM) should recover in Q4 as we believe banks were able to start pricing up US-dollar loans amid the tighter US-dollar funding costs.

Singapore interbank offered rate (Sibor) has since recovered to 40 basis points (from a low of 35 bps in Q3 2011). NIM took a dip in Q3 partly due to negative swap offer rate (Sor) blip and lower Sibor coupled with higher funding costs for non-Singapore-dollar activities (regional businesses are included apart from US-dollar funding). Non-interest income is likely to remain soft, but positive surprises are likely as we expect the trading losses in Q3 2011 to be largely reversed.

We believe provisions should still be benign. Taking into account the above factors, we project earnings to grow 5 per cent q-o-q in Q4 2011 mainly from NIM recovery. In our report dated Dec 16, 2011, we highlighted that 2012 earnings growth would be subdued given continued pressures from NIM, particularly from the funding side although the wildcard is the banks' ability to price up loans. We have priced in higher provision charge-off rates in 2012 in anticipation of cautiousness but we are not expecting asset quality to deteriorate. Non-interest income should remain soft in 2012. Hence, we are projecting banks' core earnings to rise 5 per cent in 2012.

Without a global financial crisis scenario, the bleak outlook in H1 2012 should revert positively in H2 2012.
Singapore banks, although cheap compared to their Asean peers, lack near-term catalysts but are high-quality names to accumulate for risk reversion in H2 2012. Our economist is expecting GDP to bottom in Q1 2012 and pick up thereafter, ending the year at 3.5 per cent growth.

We are keeping our 'buys' on the Singapore banks. We still prefer OCBC to UOB. The change of guard at OCBC's helm should not see significant changes in policies and directions, in our view, as they are internally sourced.