Singapore’s banks are seeing a slowdown in growth, with more modest gains ahead amid a softer GDP outlook, write CGS-CIMB Research analysts Andrea Choong and Lim Siew Khee.
In a Jan 2 note, Choong and Lim are maintaining “neutral” on the banking sector here, with a “hold” call on leader DBS Group and a target price of $36.50. “DBS had an estimated $2.1 billion in management overlays as at 3QFY2022 ended September. The asset quality of its onshore Mainland China property exposure (0.5% of group loans in 3QFY2022) remains contained; the majority of these were extended to state-owned enterprises.”
Meanwhile, Oversea-Chinese Banking Corporation (OCBC) and top pick United Overseas Bank (UOB) receive “add” calls with target prices of $13.70 and $34.80 respectively.
“OCBC’s robust common equity tier-1 (CET-1) ratio of 14% remains a key advantage, whether for mergers and acquisitions or to cushion against asset quality deterioration. Clarity on capital management plans could be a re-rating catalyst,” write Choong and Lim. “We believe write-backs of management overlays at UOB would be unlikely until Covid-19 truly blows over. The credit quality of UOB’s portfolio of loans under moratorium remains healthy. Asset quality concerns from its small- and medium-sized enterprise (SME) and Asean portfolio have been well contained, in our view.”
Banking system loans contracted 1.8% y-o-y in November 2022, largely the result of a 6.8% y-o-y decline in non-resident loan growth, primarily regional loans, write Choong and Lim.
Resident loans, mainly domestic loans, rose 1.3% y-o-y that month as strong growth in loans for financial and insurance activities (up 12.4% y-o-y) and building and construction (up 2.6% y-o-y) were offset by shrinkages in the transport, storage and communication (down 8.3% y-o-y) and general commerce (down 6.4% y-o-y) sectors.
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In the resident consumer loans segment, mortgage drawdown eased to 4% y-o-y in November 2022 as personal loans dipped 8.2% y-o-y. In contrast, almost all non-resident loan segments contracted in Nov 22; loans for general commerce (down 8.5% y-o-y), manufacturing (down 7% y-o-y), and financial and insurance activities (down 6.2% y-o-y) declined the most.
Choong and Lim say investors can expect more modest loan growth in FY2023 amid a softer GDP outlook.
On balance, system loans contracted 1.8% in 11M2022. Taking into view the likelihood of slower system loan growth in 4QFY2022 ended December, Choong and Lim expect Singapore banks to record between 5%-7% full-year loan growth in FY2022, compared to FY2021’s 5%-11%.
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“We highlight that the weaker loan growth could persist into FY2023, in line with a softer Singapore GDP growth outlook. In tandem, we expect loan growth to ease towards c.4-5% in FY2023,” they add. CGS-CIMB Research forecasts 3.8% GDP growth in 2022 and 2% in 2023.
System deposit growth still strong
System deposits growth eased to 6.4% y-o-y (up $103 billion) in November 2022, from a peak of 11.8% y-o-y in August 2022, based on latest Monetary Authority of Singapore disclosures.
Notably, the majority of these inflows were denominated in foreign currency (FCY) (up $95 billion, or 11.2% y-o-y). Unsurprisingly, most of these deposits were placed as fixed deposits (up 61% y-o-y) given the rising interest rate environment.
System current account, savings account (CASA) deposits retraced further by 15% y-o-y in November 2022 and accounted for 57% of system deposits, from 71% in November 2021.
The Singapore banking system liquidity remained ample, write Choong and Lim, with all-currency loan-to-deposit ratio (LDR) coming off to 75.2% in November 2022, from 82% in November 2021.
More granularly, Singapore dollar LDR held relatively steady at 74% in November 2022, compared to 73% in November 2022, while FCY LDR decreased to 76% from 90% in November 2021, a likely two-pronged result of softer regional loan growth and the influx of FCY deposits, say the analysts.
Choong and Lim think softening US inflation readings provide a firmer argument for the Fed to slow the pace of its rate hikes. “Although we expect net interest margin (NIM) expansion to continue into FY2023, we see limited scope for further upward earnings revisions as rate hikes pause. UOB is our top pick for its more attractive valuations. The integration of Citi’s portfolio is a key re-rating catalyst.”
As at 1.55pm, shares in DBS are trading 19 cents lower, or 0.56% down, at $33.73; while shares in OCBC are trading 3 cents higher, or 0.25% up, at $12.21; and shares in UOB are trading 9 cents lower, or 0.29% down, at $30.61.
