Domestic banking units (DBU) funding is being supported by foreign currency deposits and funding costs are expected to trend downwards as liquidity remains flush, say CGS-CIMB analysts Andrea Choong and Lim Siew Khee in a September 30 note. The analysts are maintaining “neutral” on the sector, recommending “hold” on all three banks with target prices of $20.46 for DBS, $9.38 for OCBC and $20.58 for UOB.

The contraction of system loans, a combination of domestic banking units (DBU) and Asian Currency Units (ACU), tapered off slightly, shrinking 0.7% m-o-m in August, compared to the 1.0% to 1.3% m-o-m decline over April to July, note the analysts.

This marks the fifth consecutive month of decline since regional borders were shut in March to contain Covid-19. The declines in August reflect the worst-hit sectors since March, which came mainly from the manufacturing (-13% over April to August) and general commerce (-15%) sectors, as well as reduced financing to financial institutions (-5%). 

The building and construction sector remained comparably unscathed (+4% over April to August). “Taking into account a weaker 3Q2020 Singapore GDP projection on the back of stagnating manufacturing PMI gauges, our FY2020F GDP forecast is revised from -4.9% to -5.7%. That said, we keep our FY2020F loan growth estimate at approximately 4% as we project a pick-up in credit demand into FY21F, in line with our forecasted GDP outlook of +5.3% in FY2021F,” say Choong and Lim.

On the domestic front, unsecured consumer financing offset the reduction in housing loans (-0.1% m-o-m). Credit card transaction volumes held their momentum since normalising in June when Singapore circuit breaker restrictions were eased at +1.7% m-o-m in August, while personal loan drawdowns edged upwards by +1.5% m-o-m. 

Although positive in its contribution to loan growth rates, Choong and Lim note that the higher 7.3% credit card charge-off rate in 2Q2020 (vs. 5.5% quarterly average over FY15-19) and simultaneous rise in personal loans may be warranted as a leading indicator of softer business sentiment on the ground. 

That said, non-performing loans (NPL) ratios across DBS, OCBC and UOB have so far remained steady at approximately 1.6% in 2Q2020 while impairment provisions still remain within guidance at approximately 80 to 130 base points over FY2020-2021). “However, this could make the case for a possible extension of moratoriums in Singapore, which is currently slated to expire at end-December,” they note.

Having expanded strongly over the year, DBU deposit growth was a smaller +0.4% m-o-m, or $3.2 billion, in August. These were primarily contributed by $2.8 billion in foreign currency deposits of +11.5% m-o-m, possibly due to SGD strength, say Choong and Lim. 

This is a stark reversal of the $2.5 billion net outflow over May to July, they add. “While we note that FCY deposits in the DBU paint a partial picture of system funding (ACU balances not published), the sustained DBU funding inflows point to flush liquidity levels across the banks, especially when compounded by soft credit demand.” 

“We think that NIMs [net interest margins] will still be a beneficiary as funding cost reductions catch up with falling yields and expect milder q-o-q compression come 2H2020F as benchmark rates bottom out.”

As at 1.34pm, shares in DBS are trading at 44 cents higher, or 2.21% up, at $20.35, while shares in OCBC are trading 17 cents higher, or 2.02% up, at $8.59, and shares in UOB are trading 37 cents higher, or 1.94% up, at $19.40.