The STI gapped 0.5% down at open yesterday and managed to recover some of the losses, finally closing at 3,287.83 (-0.1%). The local banks opened lower and failed to end higher, underperforming the STI. DBS was the top laggard among the STI constituents, falling 1.4% for the day to close at $16.62.

Macquarie Equities Research (MER) released a research report on 3rd June after the MAS released figures which show that the loan deposit ratio (LDR) moved higher.

Event

* The MAS data release for end April 2013 indicates 1) strong YoY system loan expansion but slower sequential MoM growth than in previous months, 2) slower YoY growth in deposits – and no growth on a MoM basis, and 3) a persistent rise in total system LDR to reach a new record high.

Impact

* Singapore’s total loans (combined Domestic Banking Units (DBU)/Asian Currency Units (ACU)) in April expanded by 16% YoY / 1% MoM, while total deposits increased 9% YoY / flat MoM. This led the system LDR to an historical high of 108%.

* For domestic business units only, loan growth was 20% YoY and 1% MoM. Deposit growth was slower at 10% YoY and 0.1% MoM. The DBU LDR is thus continuing to climb and has hit 97%, the highest level since October 1998.

* Breaking down the DBU data, consumer loans were up 15% YoY and 1% MoM in April. Generally consumer credit expansion has been steady across the five disclosed segments, with mortgage growth steady at 16% YoY and 1% MoM. The exception is auto loans, which fell by 3% YoY and 1%.

* DBU corporate loans grew 24% YoY but 1% MoM, again suggesting a possible sequential slowdown after a very strong 1Q13. In particular, manufacturing loans (+61% YoY but -0.2% MoM), general commerce (+32% YoY / +1% MoM), and other corporate (+9% YoY / -3% MoM) showed some weakness in the month of April.

* On the other hand, building and construction loans, the largest segment of DBU corporate lending, increased 20% YoY and 3% MoM, so the data on DBU corporate loans is somewhat mixed.

* The domestic banks appear to be tapping wholesale markets rather than paying for fixed deposits. Fixed deposits in the DBU data increased by 6% YoY but fell by 1% MoM, while current account, savings account (CASA) deposits increased. Meanwhile, CASA deposits increased by 12% YoY and 1% MoM, with the CASA ratio at 60.5% of total deposits (up from 59.1% in April 2012).

MER’s outlook

* MER retains a Neutral weighting on the Singapore banks on valuations, an expected slowdown in earnings momentum, and a cautious strategy view on Singapore. While higher long-term interest rates have created a modicum of buzz for the stocks in recent days, the impact on net interest margins (NIMs) should only be marginally beneficial given that the bulk of asset yields are priced off the short end of the curve.

* MER has no Outperforms in the sector, although admittedly the downside to MER’s target prices is limited. For investors who wish to retain exposure, MER would focus on DBS given the bank’s recent operating record of value creation. The change to MER’s view here is that in recent days MER has become increasingly confident that DBS will not agree to purchase an associate stake in Danamon, whereas previously MER was concerned that they might. MER now thinks the bank will either do the full deal or walk away, which is the right course of action in MER’s view.

Source: Macquarie Research - 5 Jun 2013