Maybank positive on Singapore banks despite rising rates; UOB is its top pick

Maybank positive on Singapore banks despite rising rates; UOB is its top pick

By: 
Michelle Zhu
22/05/18, 03:15 pm

SINGAPORE (May 22): Maybank Kim Eng is remaining “positive” on Singapore’s banking sector in spite of rising fixed deposit (FD) rates as it continues to anticipate catalysts from NIM expansion, higher loan growth and fee income.

The research house’s top “buy” pick is UOB, which has a target price of $32.88, for its pricing discipline and dividend upside potential.

OCBC and DBS have been rated “buy” and “hold” at target prices of $14.60 and $30.80, respectively.

In a Monday report, analyst Ng Li Hiang says that while he expects the SGD customer cost of funds to rise given the latest 3M SIBOR rates, this is likely to be offset with the expansion of NIM with higher lending yields.

Based on Ng’s observations, FD rates have risen 10-25 bps since April, with OCBC and UOB raising their promotional rates as DBS raised its 9-12 month rates by 25-35 bps.

“They [OCBC, UOB and DBS] continue to prefer CASA deposits as these are typically sticky. CASA mix has improved by 9-13ppts since 2008: DBS from 54% to 63%, OCBC from 34% to 47% and UOB from 36% to 46%,” notes the analyst.

In particular, Ng likes UOB as it has the highest SGD loan-deposit ratio at 95% versus peers’ 86-88% and the system’s 86%, based on estimations.

“Local banks continue to pay for current deposits as they bundle or cross-sell them with other products such as credit cards…. With higher loan demand, banks are likely to price more aggressively to compete for deposits,” says the analyst.

“That said, we think banks have scope to improve their liability management. Despite higher rates, the banks’ customer cost of funds has not climbed as much. Between 1Q15 and 1Q18, the banks’ customer cost of funds rose by 5-16bps, in contrast to the increase in SIBOR/LIBOR by 63/166bps. For OCBC and UOB, the spread between SIBOR and customer cost of funds turned positive to 2-6bps in 1Q18,” he adds.

As at 3.05pm, shares in UOB are trading 4 cents lower at $29.57 or 1.4 times FY18E book.

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