2H10 challenging for Singapore banks: DBS Vickers

Written by The Edge


Thursday, 19 August 2010 12:08

The second-half of the financial year will be a challenging one for Singapore banks with net interest margin still under pressure, loan growth moderating, says DBS Vickers, according to Dow Jones.

With provisions almost at all-time lows, non-interest income will be key factor determining earnings performance. Expects fee income to remain robust in 2H10 given strong capital markets.

UOB - Citi

Loan Demand - Mgmt noted that credit demand is driven more by working capital

requirements (rather than capex needs), while also seeing more corporates going to
the capital markets for funds. At group level, mgmt expects high single digit loan
growth for 2010, but added that profitability is more important than volume growth.
Increased demand for longer-tenor fixed rate loans by corporates seeking to lock-in
low interest rates, but UOB not keen to compete in this segment.

 S$5bn MTN Program - Mgmt also noted an increase in demand for US$-loans by
corporates. The recent establishment of the S$5bn euro MTN program will provide
bank with additional capacity and flexibility to fund US$-loans when needed.

 Growth Drivers - 1) Growing regional contribution. Regional markets offer better
margins (relative to Singapore); Mgmt looks to lift contribution from overseas units
to 40% (1H10: 33%). 2) Growing fee income. Increase cross-selling efforts, and
focus on growing customer’s wallet size. Efforts supported by having an integrated
platform and product suite across the region.

 Singapore outlook - Keen competition likely to put pressure on loan yields,
particularly in the consumer and large corporate space. SME banking space also
seeing more competition, though mgmt added that the recent crisis has further
demonstrated importance of long-term relationship, noting that clients appear to be
more willing to pay a premium in return for reliable (“through the cycle”) banking
relationship.

 Others. [1] Asset quality remains good, no new NPL formation from Asian
corporates. [2] In China, UOB hopes to bring down LDR (c.140%) by garnering
more retail deposits. LDR lower than or near 100% in other regional mkts.

Banks - CIMB

• DBS the best, UOB and OCBC within expectations. The banks’ 2Q came in

within expectations with common features being 1) accelerating loan growth; 2)
lower provisions; 3) widening capital buffers; but 4) stronger-than-expected margin
pressure. DBS stood out from the pack because it had an extremely strong trading
gains. OCBC missed our PPOP numbers as its costs spiked up unexpectedly.

• Revenue challenges await. Our impression from 2Q is that revenue challenges are
brewing. The lending business sees tentative credit demand as disintermediation is
a rising trend again. Tighter lending spreads and lower yields from investment
securities are weighing down on margins. Revenue growth opportunities lies in fees
but those opportunities could be somewhat blunted if capital markets remain edgy.

• Sector rated Overweight; top pick OCBC, least preferred DBS. The sector is
rated Overweight though as valuations have pulled back to almost -1sd from mean
P/BV and looks attractive relative to other cyclicals. Also, having gone through
Banking Crisis Round 1 two years ago and operating away from western markets
that still need to cope with de-leveraging, we believe that the Singapore banks will
hold up. Our top pick is OCBC (Outperform, TP S$10.08) as we expect it to be best
positioned to derive revenue growth. DBS (Underperform, TP $14.03) saw its 1H10
revenue growth supported by trading gains - that is inherently volatile - but, ROE still
lags behind peers even with the trading boost and goodwill write-off. It is our least
preferred. UOB (Outperform, TP $21.37) might be a near-term revenue growth
laggard, but the avoidance of low-margin loans could accelerate the regionalisation
strategy while the de-risking of its balance sheet is a positive.