SINGAPORE (June 14): Maybank Kim Eng Research says it is optimistic that Singapore banks have some scope ahead to improve their liability management, which could result in higher net interest margins (NIMs).
“Lending yields may be under pressure from competition/high quality credit but Singapore banks have the ability to manage their liability costs to at least maintain or modestly improve NIMs,” says Maybank analyst Ng Li Hiang in a Wednesday report.
In recent months, the closing of the negative spread between SIBOR/LIBOR to customer cost of funds implies that banks are already taking steps to lower their liability cost, the analyst says.
However, Maybank is keeping its “neutral” rating on the Singapore banking sector.
“CASA (current account, savings account) is now a much larger proportion of deposits for both the Singapore DBU (domestic banking unit) banking system and Singapore banks’ deposit base,” says Ng.
But Ng notes that CASA deposits cost more than fixed deposits (FD) in Singapore, and that CASA deposit rates are now higher than FD rates.
“In its zeal to gather current deposits and use such accounts as a means of attracting new customers, Singapore banks have been paying up for current deposits. Such deposits are no longer regarded as a cheap source of funding for Singapore banks,” Ng says.
On a brighter note, Ng says that current account customers tend to be stickier than FD customers.
“Having a larger proportion of CASA deposits also means that the banks have the flexibility to managing deposit costs,” Ng adds.
Within the sector, Maybank’s preferred pick is DBS Bank on the back of its ability to manage liability costs and drive pre-provision operating profit (PPoP).
“Unsurprisingly, DBS has the lowest cost of funding as compared to peers thanks to its low-cost POSB’s CASA deposit franchise and active liability management,” Ng says.
Maybank has a “hold” call on DBS with a target price of $19.18.
As at 1.12pm, shares of DBS are trading 15 cents lower at $20.63.
