Sector Overview

The Singapore Banking Sector provides traditional lending and depository functions, as well as other services in the areas of commercial banking, financial advisory, asset management, insurance broking and capital market services.

FY2014 – An exciting year ahead

Net Interest Margins to rebound?

NIMs have stabilized for 3rd consecutive quarter. With the decision on Dec 18th to start QE tapering, this could mean a revival in the interest rate cycle is in sight and confirms our outlook for potential industry NIM recovery in the medium term.

Potential for higher loan pricings coupled with a strong deposit franchise will benefit the banks. As our banks continue to seek higher yielding overseas loans growth, this could be an upside to NIMs as well.

Loans growth remain moderately positive

Management have generally guided for FY14 loans growth to be in the high single digit region.

Softness in mortgage loans growth is expected to kick in in 2H14 and the 3 banks have guided that mortgage loans origination have decreased by about 30%.

Despite tightening system liquidity and increasing LDRs, we remain unchanged on our view that liquidity levels remain healthy and LDRs may further increase past current high levels for better efficiencies.

As we believe that global and Singapore macro conditions have been showing positive signs, this will pair up well with loans growth.

Fees and Commission strong, Non II volatile

Growth of Fees and Commission should continue to be healthy from focus on trade flows and favourable market conditions due to global economic recovery.

Non Interest Income (Non II) continues to be volatile. Higher recurring contributions from customer flow is a positive.

Credit cost should remain benign

NPL remains low, little credit quality concern despite liquidity squeeze as focus is shifted towards short-term loans, and improving macro environment.

Investment actions

We are positive on the potential for improving margins in the medium term. Loans growth should continue to be broad based but lower than FY13’s high base and should be at a moderate pace on the back of positive economic outlook. Fees and commission should continue to drive earnings as trade-related, wealth-related, loans-related and bancassurance fees continue to gain traction. Based on an increasingly positive global macro outlook and strong fundamentals, we maintain “Overweight” on the banking sector. We maintain our “Accumulate” rating on DBS (Target Price: $19.09) and UOB (Target Price: $23.03), and “Neutral” rating on OCBC (Target Price: $10.62) based on our P/B derived valuations and coverage is transferred from previous analyst. DBS remains our top pick for its stable earnings growth profile, standing to benefit the most from higher interest rates, and strong foothold in HK while we remain neutral on OCBC due to its relatively more volatile earnings profile.

Source: Phillip Securities Research - 30 Dec 2013