Last month’s removal of the dividend cap on Singapore’s three banks has played out its impact, say CGS-CIMB Research analysts Andrea Choong and Lim Siew Khee.
Choong and Lim are maintaining “neutral” on the banking sector here, with “add” calls on all three banks. The analysts set target prices of $32.70 for DBS Group, $13.75 for Oversea-Chinese Banking Corporation (OCBC) and $29.00 for United Overseas Bank (UOB).
“DBS Group’s earnings were supported by low credit costs in 1HFY2021, resulting in total impairment provisions of just $89 million (FY2020: $3 billion). Its key revenue drivers of wealth and treasury income remained strong in 2QFY2021, albeit normalised from its record-high level in 1QFY2021,” write Choong and Lim.
Meanwhile, OCBC was the only bank to top up its management overlays in 2QFY2021, say Choong and Lim, given its “more cautious asset quality outlook”, particularly in Malaysia and Indonesia. “Nonetheless, its capital buffer remains stronger than peers at 16.1%.”
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Finally, UOB’s approach to impairments has been more measured compared to its peers over FY2020, say Choong and Lim. "As a result, y-o-y earnings growth in FY2021F will likely be relatively modest, albeit stable, in our view."
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MAS revamps its data disclosure
In addition, the Monetary Authority of Singapore (MAS) has removed from its monthly data the divide between Domestic Banking Unit (DBU) and Asian Currency Unit (ACU) labels, starting from its report for July 2021.
First mooted in FY2015, the DBU-ACU divide has been losing its relevance, says Choong and Lim, given changes in developmental incentives and global regulatory standards between the two segments. “We understand from the MAS that previous data points are not directly comparable with Jul 21 figures given adjustments in data remeasurement,” they add in an Aug 31 note.
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Banking system loans, which recorded $1.3 trillion in July 2021, or $1.42 trillion using the previous data measurement method, are now segregated by resident and non-resident data, both segments inclusive of the Singdollar and foreign currency (FCY) loans.
Previously, DBU was mainly in Singdollar and ACU only in FCY. “While inconclusive given the remeasurement, July 2021 data suggest some contraction in system loan growth,” say Choong and Lim.
As at end-July 2021, business loans accounted for some 71% of system loans, with loans for financial and insurance activities (24% of system loans), building and construction — real property and development of land (15%), and general commerce — wholesale trade (8%) forming the bulk of this segment.”
Consumer loans (29% of system loans) primarily comprised housing and bridging loans (17%). For perspective, system loans expanded 4.6% in 6M2021 (compared to -1.1% in FY2020).
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Separately, credit card charge-off rates reduced to 4.1% in 2QFY2021 (1QFY2021: 5%, 3QFY2020: peak of 9.1%).
“We take this as a signal of improving consumer credit quality on the ground,” add Choong and Lim.
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There is still ample liquidity in the system, say Choong and Lim, with loan-to-deposit ratio (LDR) at 85% in July 2021.
“That said, deposit growth was lacklustre at +1.9% in 6M2021 (FY2020: +11.3%). Downside risks to the sector are prolonged lockdowns across the region, affecting business sentiment and credit expansion,” they add.
As at 1.20pm, shares in DBS are trading 17 cents higher, or 0.57% up, at $30.14; while shares in OCBC are trading 15 cents higher, or 1.31% up, at %11.58; and shares in UOB are trading 1 cent higher, or 0.04% up, at $25.59.
