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CGSI stays ‘neutral’ on Singapore banks although steeper-than-expected rate cuts may see sequential drop in earnings

Felicia Tan
Felicia Tan • 6 min read
CGSI stays ‘neutral’ on Singapore banks although steeper-than-expected rate cuts may see sequential drop in earnings
Loans within the Singapore banking system expanded by 0.8% on a y-o-y basis in April 2024. Photo: Bloomberg
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CGS International (CGSI) analysts Andrea Choong and Lim Siew Khee are keeping their “neutral” call on Singapore banks even though they see “green shoots of growth”.

Loans within the Singapore banking system expanded by 0.8% on a y-o-y basis in April, marking the second month of growth after 16 consecutive months of contractions on a y-o-y basis.

Like the data seen in March, loan growth in April was driven by resident loans, which rose by 1.5% y-o-y due mainly to domestic loan growth. Non-resident loans, however, offset the growth as it fell by 0.5% y-o-y due primarily to regional loans.

By segment, business loans to residents and non-residents for financial and insurance activities, which rose by 4.1% y-o-y, contributed the most to the loan growth seen in April.

However, despite the improvement in loans in March to April, the Singapore banks are currently guiding for a low single-digit growth in FY2024.

“We think that more (positive) data points will still be needed before banks will make any upwards revision to their growth guidance,” write Choong and Lim in their June 3 report.

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In April, system deposits rose yet again, this time, up by 5.1% y-o-y or $90 billion higher. The growth was led by foreign-currency deposits, which rose by 7% y-o-y or $66.8 billion, as Singapore dollar (SGD)-denominated inflows softened. SGD-denominated inflows was up by 2.8% y-o-y or $22.7 billion in April.

Growth in fixed deposits slowed further to 8.7% y-o-y in April, down from the 64% y-o-y growth seen in April 2023 as US Federal Reserve (US Fed) fund rates remained stable.

“Although Singapore banks have maintained that their loan pipelines remain healthy despite the stiff competition for high-quality corporate credits, continued repayments have hampered progress on headline loan growth figures,” note Choong and Lim.

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“System liquidity stayed ample. All-currency loan-to-deposit ratio (LDR) stood at 69% in April, as both S$ and foreign currency LDR ticked slightly lower to 69% (from 70% in December 2023),” they add.

To this end, the analysts see pros and cons to the sector. The banks remain attractive as yield plays averaging some 6% in FY2024 although the lingering asset quality pessimism amid the continued high interest rate environment is a downside.

Steeper-than-anticipated cuts in FY2025 may also be a downside to the banks’ earnings even though the delayed cuts may have improved the banks’ business outlooks for FY2024, Choong and Lim point out.

Meanwhile, stronger and sustainable treasury income and wealth management fees (as Fed fund rates are cut) are key upside risks.

Choong and Lim have kept their “add” calls on Oversea-Chinese Banking Corporation (OCBC) and United Overseas Bank U11 -

(UOB) with target prices of $15.40 and $33.30 respectively.

In their view, OCBC’s common equity tier 1 (CET-1) ratio of around 16% as at the end of the 1QFY2024 ended March 31 remains the bank’s “key advantage” for mergers and acquisitions (M&As) or to cushion against asset quality deterioration.

“Deployment of wealth inflows from recent banking system volatility is a key earnings catalyst [for OCBC],” they write.

For more stories about where money flows, click here for Capital Section

With UOB, the analysts believe that write-backs of management overlays are unlikely until Covid-19 is well and finally over.

“The credit quality of its portfolio of loans under moratorium remains healthy. Asset quality concerns from its small- and medium-sized enterprises (SME) and Asean portfolio are well contained, in our view,” the analysts add, of UOB.

They have kept their “hold” call on DBS with a target price of $35.90.

“We estimate [DBS] had $2 billion in management overlays as at end-1QFY2024. The asset quality risks of its onshore Mainland China property exposure (less than 1% of group loans) remain contained, in our view, as the majority of its loans are extended to China state-owned enterprises (SOEs),” they write.

PhillipCapital remains positive on banks

PhillipCapital analyst Glenn Thum is keeping his “overweight” call on the Singapore banking sector as interest rates inch up.

Interest rates in Singapore rose by 2 basis points (bps) to 3.68% in May, making this the second straight month of growth.

The three-month Singapore overnight rate average (3M-SORA) rose by 6 bps y-o-y and stood 2 bps higher than the 1Q2024 3M-SORA average of 3.66%, although this was the second smallest y-o-y increase since March 2022.

Interest rates in Hong Kong also recovered slightly with the three-month Hong Kong interbank offered rate (3M-HIBOR) up by 13 bps m-o-m to 4.67%, reversing from the 16 bps decline in April.

May’s 3M-HIBOR was up by 26 bps y-o-y although it stood 6 bps lower than the 3M-HIBOR average of 4.73% in the 1Q2024.

Overall loan growth in Singapore was also positive, and the largest since October 2022, notes Thum.

The banks’ shares also remained positive in May, with DBS being the best performance with a 3% increase. OCBC and UOB’s shares also improved by 2% and 1% respectively, Thum adds.

“DBS continued as the best performer this month, likely due to its FY2024 dividend guidance being the highest among the three local banks and providing clear guidance for dividend growth in the coming years, while both OCBC and UOB are maintaining their guidance a dividend payout ratio of 50% with not much clarity on how excess capital will be returned to shareholders,” he writes in his June 6 report.

To Thum, the banks’ net interest margins (NIMs) may remain flat despite the higher-for-longer interest rate environment; profits are likely to be lifted by a recovery in loan growth and fee income.

“We continue to expect the local banks’ fee income to grow by double digits and have forecasted y-o-y growth of [around] 14% for FY2024, which could add [some] $340 million to revenue,” he says.

“The growth will be led by a continued move from deposits into higher risk investments as interest rates remain flat with an expectation of rate cuts in the later part of the year. There is also a possibility for the banks’ spread from assets under management (AUM) to grow as market sentiments improve. As the banks’ net interest income (NII) and NIM remain stable, we believe fee income will provide the driver for earnings growth in FY2024,” he adds.

Like his CGSI peers, Thum sees that the banks’ dividend yields are “attractive” at 6.1% with “upside surprises due to excess capital ratios and a push towards higher return on equities (ROEs)”.

He has kept “accumulate” on DBS and OCBC and a “buy” call on UOB. His target prices for DBS, OCBC and UOB are $38.50, $15.40 and $34.90 respectively.

As at 4.25pm, shares in DBS, OCBC and UOB are trading $35.55, $14.33 and $30.84 respectively.

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