Singapore’s banks are still experiencing broad-based business contraction, says CGS-CIMB, and while credit growth may pick up as GDP recovers, the end of moratoriums could deepen asset quality pressures.

CGS-CIMB analysts Andrea Choong and Lim Siew Khee are maintaining “neutral” on banks in an August 31 note, recommending “hold” on all three banks, namely DBS Group, Oversea-Chinese Banking Corporation (OCBC) and United Overseas Bank. 

Singapore's bank lending dropped for the fifth month in July. Total loans from the domestic banking unit – which capture lending in all currencies, but mainly reflects Singapore-dollar lending – came in at $678.7 billion in July, according to preliminary estimates announced August 31 by the Monetary Authority of Singapore (MAS).

System loans, consisting of the domestic banking unit (DBU) and an Asian currency unit (ACU), contracted in the aftermath of reduced business activity due to Covid-19. The 1.0% m-o-m contraction in July was mainly attributable to regional operations (ACU, -1.8% m-o-m/+2.1% y-o-y) as the decline in domestic loans (DBU) tapered (-0.2% m-o-m/-0.3% y-o-y), say Choong and Lim.

See: Singapore's bank lending drops for fifth month in July

Overall, manufacturing loans suffered the largest decline (-8.9% m-o-m), followed by the transport, storage and communication (-3.8%) and general commerce (-2.7%) sectors; building and construction (B&C) loans continued to expand steadily. 

Retail loan growth was a slight offset as credit card receivables (+2.2% m-o-m) and loans to professional and private individuals (+1.5% mom) picked up. 

Notably, the Monetary Authority of Singapore reported that NPLs in the banking system rose to 2.65% in 2Q2020, from 2.01% in 4Q2019 – a reflection of broad economic weakness at the height of global border closures. 

CASA deposits, or the amount of money that gets deposited in the current and savings accounts of bank customers, were the main conduit of fund inflows in July 20 given the low interest rate environment – rising 1.6% mom as fixed deposits contracted 0.6% m-o-m. 

That said, benchmark rates are bottoming out, easing NIM pressure. The decline in benchmark rates over 2M3Q2020 were not nearly as severe as they were in 2Q2020. 3M SIBOR/SOR/LIBOR changed - 12bp/+3bp/-6bp over July-August 2020 to 0.42%/0.20%/0.25%, a much smaller quantum than - 83bp/-86bp/-93bp recorded in 2Q2020 which led to the 16-24bp q-o-q NIM decline across the local banks. “These trends solidify our belief that NIM compression will likely ease in 2H2020, alleviating some of the pressure on the bottom line from pre-emptive impairments,” say Choong and Lim. 

“We remain optimistic on a gradual pick up in credit growth from here onwards, in line with our view of Singapore GDP rebounding to +5.3% in FY2021F, from our forecasted -4.9% in FY2020F,” note Choong and Lim. 

As at 10.45am, shares in DBS are trading at 8 cents lower, or 0.38% down, at $20.79, while shares in OCBC are trading 3 cents lower, or 0.35% down, at $8.65. Shares in UOB are trading 2 cents higher, or 0.10% up, at $19.59.