On 30th November, Macquarie Equities Research (MER) released a research report on the banking sector. In its report, MER said that the MAS October data release indicates a rebound in loan growth for sector Domestic Banking Units (DBU), with SGD deposits failing to keep pace and DBU loan to deposit rates (LDR) reaching yet another peak. MER thinks that this should put continued pressure on SGD deposit costs.

DBU LDR hits 14-year high
DBU loans rose 17.9% year on year (YoY) and 1.9% month on month (MoM), indicating a rebound of growth momentum vs Oct. But DBU deposits, 99% of which are SGD, grew by just 5.5% YoY / 1.5% MoM. As a result, the DBU LDR rose to 94.9%, the highest level since Nov 1998. But Asian Currency Unit (ACU) deposit growth (all FX) was faster than ACU loan growth, so the entire system LDR was up just 20bps MoM at 102.9%.

The DBU loan growth was surprisingly broad based, with corporate loans up 19% YoY / 1.3% MoM and consumer loans up 16% YoY / 1.8% MoM. The rebound in mortgages accounted for 26% of total YoY growth. This may be counterintuitive given the new mortgage restrictions that came into place during the month. But MER thinks this is a function of drawdowns. MER’s property analyst Brandon Lee expects 59% of the 12K units of 2012 project completions to happen in the second half of the year, which may explain the continued expansion of mortgages in the face of newly added restrictions.

MER’s Outlook
MER shifted its rating of Singapore banks from Neutral to Overweight when it upgraded DBS to Outperform on 21 Nov. MER’s view then was that the stocks had been oversold after posting the second worst performance in Asia over the prior three months. Pre-provision operating profit (PPoP) momentum is likely to remain weak in 4Q12-1Q13, with earnings dependent on extremely low provisioning. This may not exactly be an exciting time, but MER believes they still offer relatively attractive valuations and thus limited downside risk.
MER’s top pick is UOB where MER perceives less risk of disappointment given their relatively conservative risk management and provisioning policy. The risk to this call is higher SGD deposit costs, an environment in which DBS should be better positioned to maintain net interest margins (NIMs). MER has Neutral on OCBC due to earnings uncertainty.

Singapore Market Wrap

Overnight Market Wrap

In the US, President Barack Obama and House Speaker John Boehner had a private meeting and no details of the negotiations were released. Still, both of them issued statements saying that "the lines of communication remain open".

 Overnight Markets

Source: Macquarine Research - 11 Dec 2012