Singapore Banks

CIMB Research, June 30

MAS banking data for May showed healthy YTD domestic banking unit (DBU) loan growth of 4.1 per cent (April: 2.9 per cent), broadly in line with the banks' guidance of high single-digit to low-teens loan growth for the full year.

The 1.1 per cent month-on-month loan growth was led by business loans (plus 1.6 per cent m-o-m, plus 6.3 per cent YTD), building and construction loans (plus 1.1 per cent m-o-m, plus 3.1 per cent YTD) and mortgages (plus 0.7 per cent m-o-m, plus 2.5 per cent YTD). Meanwhile, consumer loans shrank 0.2 per cent m-o-m and 0.2 per cent YTD as demand for car loans and share financing continue to fall.

A worrying trend in May is that DBU deposits shrank (minus 0.8 per cent m-o-m, minus 0.2 per cent YTD), led by an outflow of fixed deposits. We have to go back to as far as March 2003 (Sars) to find a y-o-y decline in system deposits.

As loan growth continues to outpace deposit growth, DBU loan-deposit ratio is up (May:111 per cent, April:109 per cent), so is Sing dollar loan-deposit ratio (May:84 per cent, April: 83 per cent).

A shrinking deposit pool is worrying as banks will have to compete aggressively for a shrinking pie, hiking up funding costs for all.

The concern is accentuated with the new liquidty coverage ratio requirements, especially for the foreign banks who need to offer attractive rates to compete. If higher rates merely poached fixed deposits from the local banks, it would not be a worry.

However, recent current and savings (CASA) account packages suggest that the local banks are equally wary of CASA slippage.

We maintain our "overweight" call on the sector as the banks seem to be able to pass out higher funding costs to loans. DBS is our top pick, as its large CASA base (2.5 and 2.75 times that of UOB and DBS respectively) will allow it to remain relatively sheltered from impending deposit competition.

OVERWEIGHT