Singapore Banks

Macquarie Research, March 12

WE visited with branch-level loan officers at the Singapore and MNC banks in Singapore to try to better understand the recent rapid growth in "other consumer" loans as discussed in our March 9 note, "Consumer loans: The power elite?" After this, and further top-down analysis, we are more comfortable with the banks' explanation of this trend as being largely driven by HNWIs (high net-worth individuals).

Notably, FX-denominated Asian currency unit loans, which we believe are mostly collateralised, have recently seen a rapid increase. We find that this segment's growth trend has a high historic correlation to Asean currency depreciation, leading to the inference that this is about short-term FX needs.

Unsecured lending, with rates starting from 6.6 per cent, appears to be geared to SGD lending to the general public. Confirmed non-HNWIs as we are, it was more difficult to obtain the terms that bankers grant to HNWIs, especially in the foreign currency books. But non-SGD loans are largely secured against liquid assets and private property and appear to be cheaper at around 2 per cent. However, our sense is that the domestic banks are generally not aggressive participants in FX lending to retail clients ... FX lending drove the recent demand spike, as seen by the monthly ACU data. ACU consumer loan growth has likely been driven by secured lending, while unsecured loans appear generally to be SGD-denominated.

ACU "other consumer" momentum is highly correlated with Asean currency declines, especially IDR (Indonesian rupiah) and MYR (Malaysian ringgit). This suggests borrowing is driven by pending FX (eg, US dollar) liabilities amidst the sharp depreciation in regional currencies, with Indonesia likely the main factor this time around (given that Malaysian onshore USD books are highly liquid).

We are not suggesting that the ACU "other consumer" growth is a reason to panic, especially as domestic banks do not appear to be aggressive participants. Based on both Singapore's overall NPL (non-performing loans) ratio and the disclosures of the three Singapore banks, NPLs did not spike in 2008-09 despite similar trends in loan growth momentum. We do not expect a significant rise in NPLs now but would as always be watchful for possible signs of weakness.

"Overweight" Singapore banks. We think that the growth trend will ease as currencies stabilise and we assume that credit costs from this segment will not spike significantly, similar to the 2008-09 cycle.

We don't think the Singapore banks are major players in this segment as their loans to private individuals were flat q-o-q in Q4 2013.

DBS is our top pick, largely as a play on rising short-term interest rates as early as 2015, while UOB is our second choice. We are more cautious on OCBC, given that M&A-related news flow could cap sentiment in the short run.

Twelve-month target prices are: DBS: $18.64; OCBC Bank: $9.50; UOB: $21.88.

Sector - OVERWEIGHT