The STI gained 0.3% yesterday with financials leading the rally. As a sector, financials added 9.9 points to the index when the STI only increased 9.1 points. Looking closely, UOB is the top leader after surging 1.9% and DBS came in second after its 0.8% advance. OCBC lagged the two banks, ending 0.1% higher. Earlier this week, Macquarie Equities Research released a research report on Monday stating that UOB is their top pick among the local banks and some excerpts are shown below.

Event
The MAS released loan and deposit growth data for Singapore for May 2014. Total system loan growth in Singapore slowed to 15.9% year on year (YoY) in May 2014 vs 19.7% YoY for the full year of 2013. Combined with system deposit growth of only 3.6% YoY, the loan-to-deposit ratio increased to a new record high of 112% from 105% in December 2013.
 
The three key points are that (i) system deposits contracted by -1.1% month on month (MoM) which may intensify deposit competition (ii) mortgage loan growth is holding up well due to a slower pace in re-payments and (iii) trade finance loan growth picked up but growth rates may come down again as a result of the ongoing Metal Financing issues in China.
 
Impact
System deposits declined by -1.1% (-S$4.3bn) MoM. Most of this is due to a decline in deposits from Financial Institutions (FI) which looks like a trend. In particular insurance companies are a reason for the deposit outflow MER believes. Deposits from retail and corporates remained flattish MoM. The risk points to increasing deposit funding cost pressure for Singapore banks. DBS looks best positioned given that 55% (or S$ 161bn) of the group’s deposit is low-cost current account savings account deposits.
 
System mortgages grew by 7.6% YoY (0.7% MoM) in May. Repayment of mortgage loans has likely slowed down which is supportive for mortgage loan balances and is offsetting the weakness in new mortgage loan applications (20-40% YoY decline). Moving ahead, the slow repayment will keep mortgage loan growth in Singapore for the three Singapore banks in the mid- to high single digit levels, in MER’s view.
 
General Commerce (GC) loans – a proxy for Trade finance loans – picked up again. After no growth in April (MoM), GC loans increased by 2.5% MoM in May. That said May data is before the Metal Financing scandal in China which could impact June and July data in MER’s view.
 
MER’s Outlook
MER is overweight Singapore banks on a regional sector basis.
 
While net interest margins have likely seen the bottom, increasing funding costs are likely to put a cap on any meaningful upside despite better spreads on the asset side in MER’s view. System loan growth (which includes offshore loans booked in Singapore) continues to look healthy.
 
UOB is MER’s top pick and MER sees good potential for UOB to maintain the highest underlying profitability profile among the Singapore banks. MER rates DBS Outperform which is most geared to rising rates and MER thinks that DBS is in a good strategic position to take market share, particularly in Transaction Banking and small medium enterprise (SME) banking from the multinational banks. MER has an Underperform recommendation on OCBC which is almost exclusively based on the pending Wing Hang Bank acquisition and substantial capital uncertainties as a result of it.

Source: Macquarie Research - 4 Jul 2014