Warrants Highlight

Sing Banks - Limited upside

Following the release of the MAS data on the Singapore bank loans and advances Macquarie Equities Research (MER) published a report on 1 Oct 2012 with an analysis of the data as well as their outlook on the industry. Below are excerpts from the report.

The MAS macro data indicate a continued slowdown in loan growth momentum and a mild recovery in SGD-denominated deposits in August. MER believes this is in part attributable to the banks’ deposit promotions in recent weeks. However with Domestic Banking Unit (DBU) Loan-to-Deposit Ratio (LDR) at 92.7%, the highest since 1999, MER believes the funding skirmish may heat up, with negative consequences for Net Interest Margins (NIMs).

DBU loan growth reached 19% Year-on-Year (YoY), 2% Month-on-Month (MoM), a resilient number but down from 20% in July and well off the 31% peak of Nov 2011. Aggregate Asian Currency Unit (ACU) and DBU loans were up 5.6% YoY, also well off the peak of 3Q11. DBU corporate loans increased 22% YoY while consumer loans were up 15% YoY.

The general commerce segment (a proxy for trade finance) slowed to 28% YoY growth, while mortgages remain steady at 15% YoY. MER is gratified to note that share finance loans expanded YoY for the first time since June 2011.

Deposit growth continues to underperform loan growth. Total DBU deposits improved by just 7.7% YoY. As 99% of these deposits are SGD-denominated, MER believes the recent deposit campaigns with many banks offering incrementally higher fixed deposit rates indicates some pressure on NIMs is likely to emerge from funding costs in 3Q12. This is likely to be even more impactful in 4Q12.

The DBU LDR rose to 92.7% in August, the highest level since 1998, and MER would not be surprised to hear rumblings from the MAS as this continues. The ACU LDR rose to 122% while combined ACU and DBU also rose to reach back to 104%. MER does not believe these levels of LDR for the banking system will be sustained, implying either lower growth or higher funding costs. Either way, MER does not think it is conducive for higher earnings in 2H12.

MER retains a Neutral view on the Singapore banks. The stocks have increased 24% YTD and appear to be well supported given their strong balance sheets and sustainable cash yields. However, they are now trading at close to fair value after a stellar 1H12.

As earnings momentum slows in 2H12, MER thinks the share price upside is limited. UOB remains MER’s preferred pick as the only Sing bank with an Outperform rating and 12-month target price of $20.18. MER has a Neutral rating on DBS and OCBC with 12-month target prices of $14.50 and $9.40, respectively.

Singapore Market Wrap

Positive US economic data lifts markets

On Monday night, the US Institute for Supply Management's manufacturing PMI rose to 51.5 from 49.6 a month earlier. This has exceeded economists' expectation for a fourth straight monthly reading lower than 50. A PMI value above 50 indicates activity expansion. The STI rose 0.7% to close at 3079.14 day-on-day (d.o.d).

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

Palm Oil slumps
Palm oil had its biggest daily plunge since October 2008, falling to it's lowest level in almost three years on concern that slowing demand will cut shipments from the biggest producers as output expands. December-delivery futures contract lost 8.5% to $739 a metric ton, with a total drop of 25% in 5 weeks.

Palm-oil related stock Bumitama Agri ended down 0.46% to $1.085 for the trading day.

Bumitama MBeCW130103 (Q0VW) exercise level 1.25.*

US Banks profit on Mortgages after QE3
According to Financial Times, the profit US banks earn from creating new mortgages has risen to around 1.6%. This is higher than the 1.44% profit before QE3 and even greater than the 0.5% earned on average between 2000 and 2010.

For Macquarie Equities Research's excerpts, do refer to our Warrants Highlight section.

DBS remained flat at $14.33 d.o.d. OCBC jumped 0.75% to $9.40 d.o.d. UOB rose 0.15% to end the trading session at $19.78.

DBS MB eCW121101 (QZ1W) exercise level 15.00.*
DBS MB ePW121205 (Q7SW) exercise level 13.80.*
OCBC Bk MBeCW121203 (Q1QW) exercise level 10.00.*
OCBC Bk MBePW121203 (Q4SW) exercise level 9.00.*
UOB MB eCW121101 (Q3YW) exercise level 21.00.*
UOB MB ePW121102 (Q3ZW) exercise level 19.00.*

Overnight Market Wrap

Starting the week positively

Yesterday, the S&P rallied 0.3% dod, closing at 1444.49 after manufacturing data which may signal that global economies are showing signs of recovery.

In Europe, the manufacturing figure in September though still below 50, came in better than expected. The US manufacturing figure also beat the Bloomberg survey and unexpectedly expanded. The ISM US factory index rose to 51.5 this month, an above 50 reading may imply an expansion.

Last night, the Federal Reserve chairman said that policy makers do not expect the economy to stay weak through 2015 and that they pledge to sustain stimulus even after the US expansion gains strength.

Overnight Markets

Indices	Last	Change
STI	3079.14	0.7%
HSI	20840.40	0.4%
DJIA	13482.40	-0.2%
S&P 500	1445.75	0.1%
Nasdaq	3120.04	0.2%
China A50	7275.19	1.5%

Corporate News

Corporate Announcements

STX OSV has announce it has secured a contract for the design and construction of
one Cable Laying Vessel ("CLV") for an international client. Delivery is scheduled from
STX OSV in Norway in 3Q 2014. The contract price exceeds NOK 450 million.

Wilmar refers to the US$1.3 billion Syndicated Term Loan Facility and the A$600 million Syndicated Revolving Credit Facility mentioned in its announcement of 8 November 2010 and wishes to announce that it will: fully repay a maturing tranche and upsize and extend a separate tranche of the Syndicated Term Loan Facility; and extend a maturing tranche of the Syndicated Revolving Credit Facility. The Syndicated Facilities are guaranteed by Wilmar and the Extensions are for the amounts of US$632 million (including upsize) and A$200 million respectively, whilst the maturing tranche to be repaid amounts to US$500 million.

Earnings release dates:
Fri 12 Oct: SPH (4Q12)
Thu 18 Oct: SGX (1Q13)
Thu 18 Oct: Keppel Corp (3Q12)
Thu 25 Oct: NOL (3Q12)

Ex-dividend dates:
Tue 6 Nov: Olam ($0.05)