Analysts from CGS-CIMB and RHB are maintaining their “neutral” recommendation on the Singapore banking sector following the Monetary Authority of Singapore’s (MAS) announcement that it will be extending loan payment reliefs for individuals and small and medium-sized enterprises (SMEs) into 2021.

See: MAS and financial institutions extend loan repayment support for individuals and SMEs till 2021

On Oct 5, MAS, along with the Association of Banks in Singapore (ABS) and the Finance Houses Association of Singapore (FHAS) says the extension in support measures, which were supposed to expire by Dec 31 this year, will progressively expire over 2021.

In the same announcement, MAS, ABS, and FHAS also said that they have reduced installment plans for property loans.

On that, the research team at OCBC Investment Research, as well as CGS-CIMB analysts Andrea Choong and Lim Siew Khee, also view these measures to be “slightly positive” for Singapore banks.

“Overall, we see the latest set of measures announced as a mild positive, which is in line with the ongoing proactive industry efforts to smoothen out the impact of the pandemic on banks’ asset quality and ease concerns over potential cliff effects from the expiry of support measures, although a modest growth outlook and prolonged low interest rates will continue to limit the scope of the sector’s earnings recovery ahead,” says the team at OCBC.

As at 1HFY20, DBS has a lower proportion of loans under moratorium (at around 5%) compared to UOB’s 16%, partly due to its larger exposure in Asean markets. Malaysia, in particular, contributed about two-thirds of the bank’s total loan book under moratorium and has front loaded more loan loss reserves, the team adds.

The team has also noted that it continues to see “a gradual recovery path ahead with asset quality, growth and low interest rate concerns remaining in 2021”.

To that end, OCBC Investment Research has maintained its “hold” call on DBS with a fair value of $22.50, and “buy” on UOB with a fair value of $21.50, both with yields of over 4%.

The team adds that its recommendations come on the back of sector trading at undemanding valuations and that investors should be “patient” on these counters.

For CGS-CIMB’s Choong and Lim, the measures are “neutral to slightly positive” for Singapore banks given that the interest income will still accrue on the deferred principal amounts.

“The extended support will likely smoothen out potential credit cost (around $3-5 billion guided for FY20-21F across banks) and non-performing loan or NPL (guided to rise to about 2.5-3.5%) cliff effects,” they say.

“Repayment trends from the expiry of moratoriums in Malaysia at end Sept 20 will be a useful gauge of credit cost guidance reliability, in our view. We do not expect NPLs or stage 2 restructured loans to rise solely due to the subscription of these relief schemes,” they add.

Choong and Lim have maintained their “hold” calls on all three banks with target prices of $20.46, $9.38, and $20.58, for DBS, OCBC and UOB respectively.

RHB’s Singapore research team says the further postponement of loan repayments will provide the “much-needed breathing space” for borrowers to manage their financial positions, and that it’ll prevent a “cliff effect” from happening.

“Assuming no stage transfers under the Expected Credit Loss model, this will mitigate risk of a sudden spike in NPLs come end 2020,” it says.

“As at end June 2020, Singapore banks’ NPL ratios remained low at 1.5% for DBS Group, and 1.6% for Oversea-Chinese Banking Corp and United Overseas Bank. Furthermore, loans under moratorium are manageable at 5% of total loans for DBS, 10% for OCBC and 16% for UOB. OCBC and UOB have higher portions of loans under moratorium due to their operations in Malaysia and Thailand,” it adds.

That said, the extension is unlikely to change banks’ guidance on credit cost and that the banks will continue to front load provisions in 2020, it says.

DBS guided for credit cost of 80-130bps for 2020/2021, while OCBC expects 100-130bps and UOB 120-130bps.

Of the three banks, RHB has chosen OCBC as its top pick with a “neutral” recommendation and target price of $8.70.

Shares in DBS, OCBC and UOB closed $20.71, $8.62 and $19.53 on Oct 6.