Singapore Banks

Phillip Securities Research, Sept 9

NET interest margins (NIMs) stabilised for second consecutive quarter. We see potential for gradual recovery in the medium term.

Downward pressures on lending rates were mitigated by lower customer deposit costs, and higher efficiencies through higher loan-to-deposit (LDR) ratios. Overseas loans growth will boost NIMs.

YTD loans growth was strong, broad-based, at 10.3 per cent to 11.5 per cent.

FY2013 guidance is increased to mid-double digit and mid-teens for DBS and UOB respectively. OCBC stood pat with single-digit growth guidance, citing a cautious outlook.

We expect Q3 2013 loans balance to be affected by depreciating Asean currencies (rupiah, baht and ringgit).

LDRs may further increase past current high levels for better efficiencies, and liquidity levels remain healthy.

H1 2013 fees and commission were boosted by favourable market conditions and strong wealth management contributions. Growth of fees and commission may slow in Q3 2013 from a high base, due to economic concerns in the quarter.

Non-interest income continues to be volatile. Higher recurring contributions from customer flow a positive. Q3 2013 contributions from overseas subsidiaries likely impacted by currency depreciation, macro headwinds.

There were significant unrealised available-for-sale reserve losses in Q2 2013, and continued losses are expected. Non-performing loans remain low, with no credit- quality concern.

We are positive on the stabilising of NIMs, with the potential for recovery in the medium term. Loans growth has also been stronger than expected, though likely negatively impacted by the recent depreciation of a few Asean currencies. Fees and commissions continue to grow, driven by wealth management fees.

While market-related activities have likely slowed due to macro-economic concerns in the quarter thus far, global indicators point to a recovery in the global economic environment.

Based on an increasingly positive global macro outlook, and strong fundamentals, we maintain "overweight" on the banking sector. We maintain our "accumulate" ratings on DBS and UOB, and "neutral" rating on OCBC based on our P/B derived valuations.

Sector - OVERWEIGHT