Raising sector to Overweight. With short-term rates expected to bounce in early 2015, it could unleash a new re-rating wave as early as 2H14. The earnings upswing can be powerful after several years of depression in net interest margin. We project 3M Singapore dollar SIBOR to rise to 1.0% by end-2015 and to 2.0% by end-2016 (currently 0.4%). We fine-tuned our forecasts for FY13-15 (and introduced FY16 forecasts) and used P/E as our prime valuation guide (instead of P/BV) as sector coverage is transferred to the author.

DBS still our top pick; UOB raised to BUY. We rank DBS highly as it is well positioned to benefit the most from a higher interest rate given its strong deposit franchise and liquid balance sheet. The on-going transformation at DBS should support a higher medium-term ROE profile. We foresee DBS to enjoy the strongest EPS CAGR of 15.6% over FY13-16. We also upgraded UOB to BUY on the following merits: 1) its large exposure to the resilient ASEAN market allows it to capture Asian consumer affluence; 2) management’s discipline in previous acquisition bids suggests low risk of overpaying for Wing Hang; and 3) cheaper P/E valuation. OCBC is our least preferred – rated at HOLD – for its volatile earnings profile, and risk of overpaying for Wing Hang.

What’s new in this report? In this report, we take a closer look at asset quality and liquidity to address concerns arising from a rapid 17.4% loan CAGR since Sep 2010. We conclude that industry asset quality should remain resilient because: 1) the majority of the loan growth came from the traditionally safer housing loans and short-term US dollar trade loans; 2) strong household balance sheet; 3) decent corporate balance sheet; and 4) a growing economy.

In reality, SGD liquidity remains ample with LDR of 82%. Stripping out non-Singapore dollar loans from the domestic banking unit’s loans, the Singapore dollar LDR was in the region of 82% at end-Sep 2013, paced by DBS (73%), OCBC (84%) and UOB (92%). While US dollar LDR is high (132.6% for DBS; 109.9% for OCBC; and 84.4% for UOB), the risk of a US dollar crunch (US dollar loans accounted for 25.8% of our universe’s total loans at end-Sep 2013) is minimized by the use of commercial papers and currency swaps. These short-term trade loans can be run down quickly in the face of a liquidity crunch. Furthermore, Singapore banks have proven to be able to raise substantial US dollar deposits; DBS’s US dollar deposits jumped 24.4% QoQ in 3Q13.  

Source: Maybank Kim Eng Research - 28 Nov 2013