Singapore Banking

Kim Eng on 9 Mar 2012

Maintain Underweight. Our 2012 growth forecasts have been marginally raised, and we now project a higher aggregate operating profit growth rate of 7.6% (4.9% previously) for the three banks. At the net profit level, we expect growth to taper off to 4.2% on the back of higher provisions. Trading at an average P/BV of 1.2x, valuations could be more attractive, especially since we expect ROEs to slip further to 10.7% on a blended basis for 2012, from 11.1% in 2011 and a long-term mean of 12.1%. We retain our Sell calls on DBS, OCBC and UOB.

2011 operating profit flat YoY. The 4Q11 results season saw the results of all three banks meeting expectations. Cumulatively, recurring net profit rose 4% YoY, a tad higher than our earlier projection of 1.4%, with the variance largely a function of lower-than-expected provisions. Operating profit was flat on the back of negative JAWS, as operating income growth of 4% lagged the 10% expansion in overheads.

Some NIM stabilisation. We expect NIMs to stabilise on the domestic front, aided in part by a more stable SIBOR, a recovery in SOR and better yields on corporate loans. The offset is that we expect deposit costs to remain competitive, particularly for US$ deposits, while NIMs are likely to remain under pressure in the regional countries. On a cumulative basis, we are modelling gross loan growth of 11.6% (27% in 2011), premised on loan growth of 10.7% domestically and a faster 12.6% in the region.

GDP growth remains a concern… We had earlier highlighted a fairly strong 0.8 correlation between the general business expectations (manufacturing) index and Singapore’s GDP growth, with the latter lagging the former by about three months. The index has been negative for two quarters now (-10 in 3Q11 and -11 in 4Q11), portending slower economic growth ahead. The consensus GDP growth forecast for 2012 currently stands at 3.5% versus our in-house forecast of 3%, and the risk at this stage is of growth undershooting.

…while credit costs are likely to rise. NPLs have ticked up but management at all three banks see no evidence of a deterioration in the loan books as yet. Nevertheless, we have factored in further NPL increases, and the risk to our earnings at this stage is that our credit cost assumptions are still fairly benign.