Singapore Banks

DBS on 2 Apr 2012

NO surprises as February 2012 loan growth moderated to 27.6 per cent y-o-y, 2.5 per cent q-o-q and 1 per cent m-o-m. Momentum continued to be driven by business loans albeit slower than previous months. Housing loans were stable at 16.1 per cent y-o-y but on q-o-q and m-o-m bases, there are clear signs of a slowdown, likely arising from the stricter measures.

Deposit growth slowed q-o-q and m-o-m; loan-to-deposit ratio back to 88 per cent. Deposit growth was sluggish at 10.3 per cent y-o-y, the slowest since April 2011. Quarterly and monthly deposit growth was anaemic. Both fixed deposits and low-cost deposits (Casa) moderated. Casa to total deposit ratio remained stable at 59 per cent. With slower deposit growth versus loan growth, loan-to-deposit ratio reverted to a high of 88 per cent in February 2012.

After full-year results of the banks were released at end-February, banks have guided low-teens loan growth for 2012. We project 2012 loan growth of 12 per cent. We expect the momentum to gradually moderate in H1 FY2012, and further slow down in H2 FY2012. Loan growth typically lags GDP growth by 4-6 quarters. The MAS expects Singapore economic growth to stall before a modest recovery in the latter half of 2012, and forecasts 2012 GDP growth at 1-3 per cent. As banks are likely to pace deposit growth with loan growth, we expect loan-to-deposit ratio to taper off during 2012.

We believe the focus will be on asset quality indicators, which have remained healthy so far, given that corporates' balance sheets remain strong. We continue to believe that asset quality risks will be minimal, and capital will remain robust. We still prefer OCBC to UOB for its stronger asset quality indicators and minimal exposure to European debt securities. Changes at OCBC's helm should not derail its current strategies. Nevertheless, 2012 remains a challenging year for Singapore banks to generate incremental ROE improvements given low net interest margin (NIM) and provisions.

We think earnings surprise could arise from lower than expected provisions in 2012. Consensus appears to be anticipating high provision charge-off rates for the year while the view on NIM trends is mixed.