Banking Sector

CIMB Research on 24 Sept 2012

EXCESS liquidity is ebbing away. Domestic banking unit loan-to-deposit ratio has crept up to 92 per cent. S$-deposit growth year to date is a sluggish 3.2 per cent versus loan growth of 9 per cent. UOB has been bleeding deposits for over three quarters now and DBS lost 9.5 per cent of its S$-fixed deposits in Q2 2012. Previously unfazed by deposit competition, DBS recently raised time deposit rates to match peers.

No doubt, the local banks still hold the lion's share of S$-deposits but competition from large foreign banks is chipping away the deposit franchises.

An extensive branch and ATM network used to be the key to attracting deposits. In a world of increasing digital banking transactions and sustained low interest rates, branches have lost their value. Instead, attractive rates and customised lifestyle benefits are the new battleground for deposits.

We believe that Singapore banks will see further net interest margin (NIM) pressure in H2 2012 as they react to deposit competition.

Higher inflation expectations post QE3 has led to a steeper US treasury yield curve and consequently, a slightly steeper Singapore Government Securities yield curve. A steeper yield curve gives banks the opportunity for gapping profits. This could mitigate slightly the margin pressure and boost treasury profit.

But we do not think this will be a major boost as banks will be reluctant to push up duration risk in the current environment.

Singapore banks trade at 1.06-1.26x 2013 P/BV. DBS ("outperform", TP S$17.21) now regains its position as top pick for its relatively cheap valuations and anticipated pickup in capital markets-related fees in Q3.

UOB is downgraded to "neutral" (TP $22.47) from "outperform" on potential NIM erosion and its outperformance post Q2 2012 results. OCBC ("underperform", TP $10.24) is least preferred for its full valuations.

NEUTRAL