After another sell-down yesterday, the Singapore banks are now the STI’s biggest index laggards, month-to-date. The three banks contributed a combined -27 points out of the STI’s 13 points loss since the start of March. Macquarie Equities Research (MER) released a report yesterday reiterating their Overweight on their sector.

Below are more detailed explanations from MER based on excerpts from a research report released yesterday evening.

MER visited branch-level loan officers at the Singapore and MNC banks here to better understand the recent rapid growth in ‘other consumer’ loans. After the visit and further top-down analysis, MER is now more comfortable with the banks’ explanation of this trend as being largely driven by high net worth individuals (HNWIs). Notably, FX-denominated Asian Currency Unit (ACU) loans, which MER believes are mostly collateralized, have recently seen a rapid increase. MER finds that this segment’s growth trend has a high historic correlation to ASEAN currency depreciation, leading to the inference that this is about short-term FX needs.

Impact
Mystery shopping spree. Unsecured lending, with rates starting from 6.6%, appears to be geared to SGD lending to the general public. For non-HNWIs, it was more difficult to obtain the terms that bankers grant to HNWIs, especially in the foreign currency books. But non-SGD loans are largely secured against liquid assets and private property and appear to be cheaper at around 2%. However, MER’s sense is that the domestic banks are generally not aggressive participants in FX lending to retail clients.
 
Equity home loans appear to be a popular product offered by the local banks. Owners of private property with short-term liquidity concerns may prefer these loans due to lower rates and the absence of margin calls. Total debt servicing ratio (TDSR) rules however apply, thus limiting the maximum loan quantum.
 
FX lending drove the recent demand spike, as seen by the monthly (ACU) data. ACU consumer loan growth has likely been driven by secured lending, while unsecured loans appear generally to be SGD-denominated.
 
ACU ‘other consumer’ momentum is highly correlated with ASEAN currency declines, especially the Indonesian rupiah and Malaysian ringgit. This suggests borrowing is driven by pending FX (e.g. USD) liabilities amidst the sharp depreciation in regional currencies, with Indonesia likely the main factor this time around (given that Malaysian onshore USD books are highly liquid).
 
Don’t panic. MER is not suggesting that the ACU ‘other consumer’ growth is a reason to panic, especially as domestic banks do not appear to be aggressive participants. Based on both Singapore’s overall non-performing loans (NPL) ratio and the disclosures of the three Singapore banks, NPLs did not spike in 2008-09 despite similar trends in loan growth momentum. MER does not expect a significant rise in NPLs now but would as always be watchful for possible signs of weakness.
 
MER’s outlook
Overweight S’pore banks... MER thinks that the growth trend will ease as currencies stabilise and MER assume that credit costs from this segment will not spike significantly, similar to the 2008-09 cycle.
 
DBS is MER’s top pick. MER does not think the Singapore banks are major players in this segment as their loans to private individuals were flat quarter on quarter in the fourth quarter of 2013. DBS is MER’s top pick, largely as a play on rising short-term interest rates as early as 2015, while UOB is MER’s second choice. MER is more cautious on OCBC, given that M&A-related news flow could cap sentiment in the short run.

MER has Outperform ratings on both DBS and UOB with a 12-month target price of $18.64 and $21.88 respectively. MER is Neutral on OCBC, with a 12-month target price of $9.50.

Source: Macquarie Research - 13 Mar 2014