Warrants Highlight

Singapore banks - Neutral (MER)

On 3rd January, Macquarie Equities Research (MER) released a research report on the banking sector. In its report, MER said that the MAS data indicate that the banks were focused on building up SGD deposits in November, with total Domestic Banking Units (DBU) deposit growth outpacing DBU loans on a MoM basis. This resulted in a 1ppt decline in the banks’ DBU loan to deposit rates (LDR) to 93.9%. MER believes that this points toward moderate pressure on net interest margins (NIMs) in 4Q12E.

LDR fell in November
DBU loan growth of 0.5% MoM (15.9% YoY) was behind deposit growth of 1.6% MoM (6.1% YoY), resulting in a decline in the system DBU LDR from October’s 94.9% – the highest level since October 1998. MER believes that the trend will also be reflected in the December data as banks position themselves for year-end reporting.

Given that the bulk of DBU deposits are SGD-denominated, MER believes this trend is the result of a moderate SGD deposit chase. MER’s sense is that this is most likely to impact the foreign banks, given their limited retail presence. Among MER’s coverage, UOB and OCBC are more likely to be exposed, while DBS’s POSB unit gives it a clear advantage on SGD funding.

DBU loan growth momentum has shifted back to the consumer (+16.6% YoY and 1.7% MoM) which outpaced corporate loan growth (+15% YOY and -0.4% MoM) in November for the first time since February 2011. As usual, this was driven by mortgages (+16.1% YoY and 2% MoM) which make up 73% of consumer loans.

However, the rather vaguely termed “other” consumer loans (16% of DBU consumer / 7% of total DBU loans) grew by 22% YoY. This was well ahead of credit card revolving growth of 13% YoY. The MAS’s announcement in December to warn the banks away from engendering imprudent credit card leverage among Singaporean households have led to reasonable concerns, but MER would note that credit card loans make up just 4% of DBU consumer loans and 1.8% of total DBU loans.

On the corporate side, a major swing factor has been general commerce loans, a proxy for trade finance, which peaked at 73% YoY growth in Oct 2011. That growth figure that fell to just 6% YoY in November 2012. For the combined system’s total Asian Currency Unit (ACU) and DBU loans grew 10% YoY and 0.7% MoM, with LDR flat MoM at 103%.

MER’s Outlook
MER retains a Neutral outlook on the banks, which are trading at close to MER’s estimation of fair value. Operating conditions are likely to remain challenging in 1H13, and earnings that are based on extremely low credit costs are not likely to lead to a further re-rating of valuations. That said, balance sheets are strong and yields are likely to be sustainable.

Among the big banks, MER has Outperform ratings on UOB (Target: S$21.14) and DBS (Target: S$15.16) and Neutral on OCBC (Target: S$9.60).

Singapore Market Wrap

STI edged upwards

The STI dipped briefly yesterday morning before rallying to close up 0.5% to 3,220.4 on Wednesday. Investors may have taken cue from Alcoa, the largest aluminium producer, when it reported better than expected sales figures on Tuesday night. Alcoa's announcement also marked the beginning of the US earnings season.

Call STI 3250MBeCW130430 (R5XW) exercise level 3,250.*
Put STI 3100MBePW130430 (R5WW) exercise level 3,100.*

SGX broadens clearing services, launching Iron Ore futures contracts
Shortly after reporting new highs for derivatives and commodities volumes, SGX announced that it will be offering international clients the choice of clearing OTC transactions as swaps or futures contracts. This starts from 25th February 2013 with SGX providing with Iron Ore, Freight and Oil futures contracts. This is aimed to retain and pursue more US customers, who are facing tougher over-the-counter trading restrictions. SGX rose 0.4% to $7.11 for the trading session.

Call SGX MB eCW130502 (RE5W) exercise price $7.20.*
Put SGX MB ePW130503 (R8RW) exercise price $ 7.20.*

Blue chips rebounded from previous slide
UOB and Wilmar rebounded strongly on Wednesday as they reversed their declined on Tuesday, forming part of the top 20 gainers on SGX's website. UOB had dropped 1.6% on Tuesday before rebounding with a 1.1% gain to $19.54 as Wilmar rose 3.2% to $3.60 day-on-day, erasing it's Tuesday losses.

Call UOB MB eCW130301 (R1XW) exercise price $19.50.*
Put UOB MB ePW130301 (RG1W) exercise price $19.00.*

Call Wilmar MBeCW130801 (R9HW) exercise price $4.00.*
Put Wilmar MBePW130903 (R5OW) exercise price $3.40.*

Overnight Market Wrap

S&P ends two-day decline

The S&P added gains after a two day slump, closing at 1461.02, a 0.3% increase day on day (dod). The Stoxx Europe 600 also climbed to the highest level since Feb 2011 to end the session at 288.22. This is a 0.7% increase dod.

According to Bloomberg, industrial, healthcare and raw materials led gains in the S&P 500 index with trading volumes about 3.5% higher than the 30-day average.

Seagate Technology advanced 6.6% after they announced sales which exceeded forecast while Danaher added 3.7% after management said that earnings would exceed their forecast range.

Overnight Markets

Indices	Last	Change
STI	3220.41	0.5%
HSI	23218.50	0.5%
DJIA	13390.50	0.5%
S&P 500	1461.02	0.3%
Nasdaq	3050.39	-
China A50	8319.01	-0.2%

Corporate News

Corporate Announcements

SGX announced that it is offering international customers the choice of clearing OTC transactions as swaps or futures contracts. SGX will start with Iron Ore, Freight and Oil futures contract.

Earnings release dates:
Mon 14 Jan: SPH (1Q13)
Tue 15 Jan: AREIT (3Q13)
Fri 18 Jan: CapitaMall Trust (FY12)
Tue 22 Jan: MapleTree Industrial Trust (3Q13)
Tue 22 Jan: SGX (2Q13)
Wed 23 Jan: Keppel Land (FY12)
Wed 23 Jan: CapitaCommercial Trust (FY12)
Thurs 24 Jan: Keppel Corp (FY12)
Wed 6 Feb: DBS (FY12)
Wed 6 Feb: GLP (3Q13)
Thurs 28 Feb: Noble (FY12)