Warrants Highlight

Sing Banks - Entering the doldrums

Macquarie Equities Research (MER) issued an outlook for the banking industry in Singapore on the 3rd Sept 2012, with a report titled “Singapore banks – Entering the doldrums”.

The following are excerpts from the above-mentioned report.

Loans growth is still strong, but not as strong as last year.
The Domestic Banking Unit (DBU) loan growth figure was relatively steady at 1.3% MoM and 20% YoY, reflecting a continuation of the trend of slowing loan growth that MER have seen in the past several months. Asian Currency Units (ACU) loans grew by a more moderate 12% YoY and declined by 1.7% MoM. On an aggregate basis, total loans (ACU plus DBU) increased by 16% YoY and fell 0.1% MoM. Note that the aggregate data gives the most accurate picture of total market activity, but MER believes that the Singapore banks only account for around 45% of the total market.

Deposit trends could imply higher funding costs.
DBU deposits grew by 1.2% MoM (7% YoY) which was one of the strongest sequential numbers in recent months. The Singapore banks reported flattish QoQ SGD-denominated deposit growth in 2Q12, but recent promotions may have helped attract greater deposits. The DBU LDR of 91.9% in July is the highest it has been since the Asian Financial Crisis. While this may imply higher funding costs, MER thinks it should be mild especially with loan demand waning in 2H12. Aggregate DBU and ACU deposits rose 6% YoY and 1.3% MoM.

Mortgages and property are the key drivers of DBU loan expansion YoY.
Mortgages account for 24% of YoY loans growth, the largest sector. Factoring in construction and (an assumed) half of the non-bank financial institution loans, total property related loans would work out to 47% of loan growth. MER’s view is that the property pipeline should continue to provide plenty of financing opportunities for the banks in the next several years. But general commerce, which represents 18% of total YoY DBU loan growth and manufacturing (9%) are clearly at greater risk from the external environment.

Outlook
Neutral weighting on the sector on a country strategy view as the stocks are trading at close to fair value. The Singapore banks are still the third best performing bank sector by country in Asia YTD. But the strong earnings momentum of 1Q12 slowed considerably in 2Q12. Given the toned down guidance for full-year 2012 loan growth and margins from all three of the banks, MER believes that 2H12 will be much less exciting.

UOB is MER’s top pick on balance strength, a YoY earnings recovery vs the weak 2H11, and MER’s view that management will not engage in overpriced M&A. Upside from current valuations is admittedly limited, but MER thinks the capital and liquidity strength should still merit investors’ interest, if not exactly love. MER reiterates Neutral on both DBS and OCBC.

Singapore Market Wrap

Green across Asia

The Asian markets were mostly in the green yesterday, with the STI rising 0.4% to 3,029.66 and the HSI rising 1.1% to 20,075.39. Yesterday afternoon, the German top court paved way for the creation of a EUR500bn rescue fund to tackle the eurozone crisis. However, the news failed to spark any strong rally in the equity markets.

STI 3100MBeCW121031 (Q1AW) exercise level 3,100.*
STI 2950MBePW121031 (Q0ZW) exercise level 2,950.*

HSI19800MBeCW120927 (Q1DW) exercise level 19,800.*
HSI19400MBePW120927 (Q1BW) exercise level 19,400.*

Sembcorp Marine back at $5.00
Sembcorp Marine closed 0.4% higher yesterday at $5.00. The company shares have been hovering around the $5.00 level for the past 3 weeks.

SMM's current order book consists of 15 Jackups and 2 Semi-subs in Singapore, and 6 Drillships in Brazil. Most of these orders are from top-tier contractors like Seadrill, Noble and Atwood.

Call warrant SembMar MBeCW121203 (Q0OW) exercise price $5.00.*
Put warrant SembMar MBePW130103 (Q4GW) exercise price $4.70.*
Long dated call warrant SembMar MBeCW130603 (M8NW) exercise price $5.590.*

Strong move in Yanlord
Yanlord had its strongest rally in more than 3 months. The stock rose 6.1% to close at its day high of $1.225. Other Chinese property developers also saw similar rally yesterday, with New World Development rising 3.4% and Cheung Kong Holdings rising 2.0%.

Call warrant Yanlord MBeCW121204 (QY2W) exercise price $1.20.*
Call warrant Yanlord MBeCW130201 (Q4QW) exercise price $1.40.*

Overnight Market Wrap

Germany to back the Euro

Yesterday, the German courts ruled in favour of supporting the Euro, causing indices in Europe and US to rally. The S&P closed at 1436.56, up 0.2% dod while the Stoxx Europe 600 was up 0.1% dod.

Chancellor Angela Merkel will be able to pass a bill into law for the establishment of the European Stability Mechanism (ESM). Germany was the final holdout in the ratification of the mechanism. The ESM will oversee the bailout and will work with the European Central Bank in bond purchases so as to bring down borrowing costs. However, the ruling came not without restrictions. Germany can only provide up to the agreed sum of 190bil Euro, any increase will require parliament approval.

US investors are now waiting for the Federal Reserve meeting to end, anticipating that a third round of QE will be announced after the FOMC meeting ends today. Facebook rallied 7.7% after Mark Zuckerberg said that the stocks performance is disappointing and that the company will focus on mobile advertising revenue.

Overnight Markets

Indices	Last	Change
STI	3029.66	0.4%
HSI	20075.40	1.1%
DJIA	13333.30	0.1%
S&P 500	1436.56	0.2%
Nasdaq	3114.31	0.3%
China A50	7277.50	0.1%

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Ex-dividend dates:
Wed 26 Sep: SGX ($0.15)
Tue 6 Nov: Olam ($0.05)