In the month of February where the local benchmark STI was up 2.8% or 83.5 points, UOB (+3.2%) and OCBC (+2.8%) took second and third place as the leading index constituents, contributing a total 17 points or 20% of the STI’s gains for the month. DBS underperformed its peers with a lacklustre 0.3% gain for February, this trend continued for the first two days of March. DBS is down 1.2% month-to-date compared to OCBC’s -1% and UOB’s +0.7% increase.
 
Nevertheless, DBS remains Macquarie Equities Research’s (MER) top pick. MER explains their view on Singapore banks in a research report released last Friday on 28 February.
 
Event
Singapore’s total system consumer loan growth has been positive but momentum is slowing, and corporate loans continue to outpace consumer as of January. However, the 16.5% year-on-year (YoY) domestic banking unit (DBU) loans growth and slower 2.9% DBU deposit growth have driven the DBU loan-deposit ratio (LDR) to yet another post Asian Financial Crisis high, at 107.2% (with the domestic banking unit plus Asian currency unit  loan-deposit ratio at 106.7%).
 
Impact
Consumer loans have slowed down across most categories, especially for vehicles and property following the series of cooling measures. But other consumer loans (+27% YoY and 8% of total loans) continue to power ahead. Details on this segment are limited, with the banks claiming that the growth is primarily loans to high net worth individuals – but offering no numbers to back this claim up. Asset quality remains strong, but MER’s sense is that low interest rates and a desire for investment leverage could mean incremental asset quality trouble in the event of a sharp global downturn in asset pricing.
 
Growth of credit card revolving balance has slowed. MER takes this as a net positive; the high yields (up to 24%) are good for net interest margins, but the growth downtrend eases concerns about household over-leverage and inability to pay off card debt amidst expectations of higher interest rates. Of note, January 2014 saw a month-on-month net repayment of credit card balances, though one month is not a trend etc, and this may be due to seasonality. But retail sales have been flat.
 
MER’s outlook
Don’t panic over the consumer loan figures, but do pay attention to the growth and asset quality trends going forward. Regulatory measures aimed at over-leveraged households may have succeeded in decreasing the risks facing the banking sector, and credit quality of consumer loans in Singapore is currently very healthy. But the growth trend bears watching and also creates interesting questions for bank meetings. MER remains Overweight the Singapore banks in the first half of 2014, with DBS as their top pick and an Outperform on UOB.

Source: Macquarie Research - 5 Mar 2014