Since the beginning of the year, SIBOR is up 0.45% and the US dollar appreciated against the Sing dollar by 5%. Macquarie Equities Research (MER) commented on the tangible benefits on the Singapore banks in a report published yesterday (17 March 2015). MER believes the banks’ earnings will get support from their US$-denominated cash inflows, which are mostly unhedged.
 
After year-to-date share price underperformance, MER has upgraded DBS to Outperform given its interest rate sensitivity and its sizeable US dollar and HK dollar loan book. UOB with the largest share of Sing dollar-denominated loans remains MER’s top-pick…
 
Impact
Singapore banks (Overweight on a regional sector basis) – Earnings of Singapore banks are sensitive to higher short-term rates which have recently moved up. MER expects increasing margins and increasing ROE in 2015 which is a rare combination for banks these days. In addition, the more than 3% dividend yield is attractive and valuation multiples look inexpensive.
 
DBS (Upgrade to Outperform, Target Price S$22.00) – It is not new that DBS is a key beneficiary of higher short-term rates due its high CASA deposits share (57%) and S$ excess liquidity. However, with Singapore short-term rates finally moving up and given the year-to-date share price underperformance, MER thinks it is a good time to revisit the investment case of DBS.
 
UOB (Outperform, Target Price S$26.00) – Among the three Singapore banks, UOB has the highest share of loans in Sing dollar of which 90% will re-price for higher SIBOR / SOR rates over three months, in MER’s view. Importantly for UOB, fixed deposit pricing – at least on the retail side – has not yet moved up significantly despite the increase in Singapore short-term rates.
 
OCBC (Neutral, Target Price S$10.00) – Together with the other two banks, OCBC too will benefit from higher short-term rates. However, MER is still not comfortable that the Greater China story will work out as planned and remain Neutral on the stock.
 
Action and recommendation
MER remains Overweight Singapore banks on a regional sector basis. With Singapore short-term rates at their highest level since January 2009 and given the earnings sensitivity on higher rates, MER believes it is a good time to revisit the investment cases of the Singapore banks.
 
MER prefers DBS and UOB over OCBC. DBS has the highest gearing to higher short-term rates due to its CASA deposit base while UOB has the highest share of Sing dollar-denominated loans of which 90% are likely to reprice over the next three months for higher short-term rates, in MER’s view.
 
At this point, MER does not expect meaningful deterioration in asset quality as a result of higher short-term rates in 2015. With the Singapore unemployment rate below 2%, MER is not yet worried about significant asset quality deterioration in Singapore retail banking. MER is more guarded on certain SME exposures (particularly indirect commodity finance exposures), direct commodity finance exposures, Mainland China exposures and non-trade finance US dollar-denominated lending.

Source: Macquarie Research - 18 Mar 2015