Singapore banks are sitting on massive liquidity and deploying it could offer strategic advantages, says Maybank Kim Eng Research analyst Thilan Wickramasinghe.
In an Oct 19 note, Wickramasinghe is recommending “buy” on all three local banks, with target prices of $35.11 for DBS Group, $14.30 for Oversea-Chinese Banking Corporation (OCBC) and $29.34 for United Overseas Bank (UOB).
“Singapore banks are sitting on massive liquidity. How they deploy could determine profitability on the other side of Covid-19. DBS has been mostly parking excess at central banks, while UOB has increased its securities holdings. For the latter, this may provide a near-term margin boost,” writes Wickramasinghe.
The banks are sitting on deposits piled up due to government stimulus and quantitative easing during the pandemic. “While we think deposit growth has peaked, the sector would need to deal with excess liquidity for a while,” says Wickramasinghe.
“We believe UOB’s regional integration (one-third of wholesale banking income is already from cross-border) and strong SME franchise would be a clear beneficiary going forward. DBS and OCBC with their North-South franchise would also benefit,” writes Wickramasinghe.
Ultimately, higher lending is the most desired option, but varying speeds of re-opening cloud near-term visibility. “Yet, we expect Asean-5 growth to surge at 5.6% GDP growth in 2022F, which should give the sector significant opportunities to participate – particularly with SMEs,” he writes. The Asean-5 are Indonesia, Malaysia, the Philippines, Singapore and Thailand.
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On a 1HFY2021 y-o-y basis, all have stayed away from government debt, likely taking into account tapering expectations early.
Placing with the Monetary Authority of Singapore (MAS) and central banks have been the most popular strategy, with DBS deposits increasing 56% y-o-y and OCBC 20%. While risk-free, yields are low and net interest margin (NIM) could be impacted.
“We see US banks such as Bank of America delivering 10% y-o-y higher 3Q2021 net interest income (NII), despite weaker loans from larger deployments towards corporate debt. Singapore banks have also been increasing allocations of investment securities, with UOB’s rising 36% y-o-y. This may result in positive read-throughs to 3Q2021 NII,” writes Wickramasinghe.
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Loan growth could ultimately ease excess liquidity pressures. “Currently, our checks suggest credit supply is crowded around large, investment grade customers. This is affecting pricing power,” writes Wickramasinghe.
As vaccinations progress, and with regional economies growing between 4%-7% in 2022F, Wickramasinghe expects credit demand to become broader, especially from SMEs and frontline sectors.
“We currently forecast Singapore banks loans to rise 7% in 2022F, but the risks are on the upside. We also expect Singapore base rates to be 21bps higher than 2020 from Fed tapering. We estimate every 10bps increase in the base rate could add 0.5-1.5% net profit after tax to the sector,” writes Wickramasinghe.
As at 3.20pm, shares in DBS are trading 1 cent higher, or 0.32% up, at $31.32; while shares in OCBC are trading 3 cents lower, or 0.25% down, at $11.95; and shares in UOB are trading 8 cents higher, or 0.30% up, at $26.85.
Photo: Bloomberg
