CGS-CIMB Research analysts Andrea Choong and Lim Siew Khee are keeping their “overweight” recommendation on the Singapore banking sector after deposits in April rose by 2.9% m-o-m.
The m-o-m growth is the strongest since the Monetary Authority of Singapore (MAS) revamped its data disclosures in August 2021.
In April, foreign currency deposits were the driving force behind the surge in the month’s deposits, with almost all of them being placed in fixed deposits.
In the same month, the sector saw banking system loans increasing by 0.8% m-o-m primarily due to the higher resident lending as non-resident lending eased.
In their report, the analysts believe that the strong deposit inflow is expected to continue, in line with the further rate hikes by the US Federal Reserve.
To date, benchmark rates have reacted to around 75 basis points (bps) of hikes from the Fed in the five months ended 2022, with the average three-month SIBOR, SOR and LIBOR rising a respective 54 basis points, 71 basis points and 77 basis points q-o-q to 1.1%, 1.2% and 1.3% in the 2QFY2022.
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“We expect the higher rates to correspond to higher net interest margins (NIMs) across Singapore banks as well, albeit with a six-month time lag, and have factored in seven Fed hikes (25 bps each) in FY2022, translating to [an estimated] 31-47 bps [in] NIM expansion over FY2023-2024,” the analysts write.
“[We] reiterate ‘overweight’ on the sector as we anticipate margin expansion to come. Persistent inflation which may suppress investment and consumption appetite is a key downside risk for the sector. Strong loss absorption buffers (CET1: 13-15% in 1QFY2022) and management overlays mitigate the downside earnings risk, in our view,” they add.
Further to their overall sector recommendation, the analysts have given all three Singapore banks, DBS, OCBC and UOB “add” calls with target prices of $40.20, $14.20 and $35.60 respectively.
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Monetisation of digital assets is a potential re-rating catalyst for DBS, although scaling up and price discovery may take time, the analysts say.
For OCBC, the bank’s “robust” CET-1 of 15.2% remains a “key tool” for several purposes including mergers and acquisitions or to cushion against asset quality deterioration.
For UOB, the analysts see write-backs of management overlays as “unlikely” until the Covid-19 pandemic blows over.
“The credit quality of UOB’s moratorium portfolio remains healthy. Its key risk of asset quality concerns from its small- and medium-sized enterprise (SME) and Asean portfolio is well contained, in our view.”
As at 1.11pm, shares in DBS, OCBC and UOB are trading at $31.33, $11.91 and $29.23 respectively.
