Singapore’s loans growth remains tepid.
Latest statistics from MAS reported sluggish loans growth of 2.2% YoY for August. Business loans growth of 4.4% YoY offset some of the contraction in consumer loans growth of 1.1% (Figure 1). Building & construction loans (+9.7% YoY) held up growth due to the progressive drawdown of loans from existing projects in the pipeline. Consumer loans contracted for the fifth consecutive month, dragged by persistent weakness in housing loans contraction of 1.1% YoY due to property cooling measures. We expect loans growth for the Singapore banks to slow to 4-5% for FY19e (2018: 7-11%) due to headwinds from property cooling measures and slowing global economic growth.
Deposits – FD growth peaked in July while CASA growth recovered from contraction.
The latest statistics from MAS for August showed CASA growth recovering to 1.4% YoY after almost a year of contraction; while FD fell from July’s decade-high growth (23.1% YoY) to 18.5% YoY in August, but still outpacing overall deposits growth of 8.1% YoY (Figure 2).
Following interest rates cuts in the U.S., some banks in Singapore have started to lower their fixed deposit rates in September (Figure 3). We reiterate our expectations of easing competition for FD in 2H19 due to further rate cut expectations and slower global economic growth. As the bank release excess FD, funding pressure should ease and offset some of the impact of lower interest rates.
Despite the recent Fed rate cut in July and a minor downward adjustment of FD rates, FD is still growing strongly. We believe that one of the reasons for sustained demand for FD was due to the saturation of appetite for Singapore Savings Bond (SSBs). The total amount applied for SSBs in August and July was S$77.5mn and S$93.0mn respectively, down from April (S$401.8mn), May (S$274.5mn) and June (S$275.4mn).
In addition, tight liquidity in the banking sector sustained the competition for deposits, making it difficult to lower FD rates too much in the near term. Hence investors would still opt for banks’ FD with higher rates (Figure 3) as compared to 1.64% for SSBs.
3M SIBOR flat MoM at 1.877%, while 3M SOR dipped 3 bps to 1.690%.
Meanwhile, the savings rate in Singapore remained unchanged at 0.16% (Figure 5). Expectations of further interest rate cuts in the U.S. will limit the upside for NIM expansion. NIM should be softer on a quarterly basis in 2H19. However, as FD rates start to trend down due to slowing economic growth, lower funding costs could offset some of the impact of lower interest rates on NIM. Hence, we still expect the banks to deliver full-year NIM improvements due to the lagged effect of loan repricing, albeit at a lower magnitude of around 1-4 bps in FY19e.
Volatility – a very favourable backdrop for derivatives.
Let’s recall back to two months ago when Trump announced tariff hikes on 1 August 2019 and even further back, on 5 May 2019 when Trump unleashed tariff hikes. These two tariff events created the two most volatile months for global stocks this year. We saw SGX’s DDAV (derivatives daily average volume) spike 54% YoY and 33% YoY in May and August respectively, in correlation with heightened volatility. Meanwhile, SGX’s SDAV growth for 1QFY20 recovered to -2.1% YoY as compared to quarterly average of -16.4% YoY in FY19. In 1QFY20, derivative volumes are trending at around 3.5% YoY growth rate.
In the near term, trade tensions between the U.S. and China might continue to escalate and create volatility in the market. With increased uncertainties due to trade and geopolitical tensions, investors hedge more and derivative products are the rare beneficiaries of a volatile environment. SGX’s derivative products capture global flows and are not as reliant on local liquidity as the securities business.
Hong Kong’s loans growth subdued at 5.1% YoY in August.
Hong Kong’s loan demand remains cautious due to the high interest rates and lingering geopolitical tensions. Residential sales and purchase value in July fell 17.0% MoM while volumes fell 15.0% MoM. Home prices in Hong Kong recovered back to the peak levels last seen in July 2018 (Figure 9). Meanwhile, 3-month HIBOR fell 7.0 bps to 2.263% (Figure 10). Higher interest rates should support the banking sector’s profitability.
Maintain the Singapore Banking Sector at Overweight. While the trade war affects investor sentiments in the near term, we believe the banks’ healthy fundamentals remain intact to withstand the volatile environment and deliver growth.
Operating environment remains stable despite slowing regional growth. Asset quality remains benign with NPL ratio at 1.5% (Figure 13) across all 3 banks. We believe the increasing diversification of the banks’ business into more stable fee income (loan, credit card, wealth management etc) will help reduce the proportion of earnings arising from volatile revenue streams (trading income, investment gains etc). Better cost management with digitalisation and low provisions in a benign credit environment should provide upside to ROEs. The banking sector provides an attractive dividend yield support of c.5%, backed by healthy capital ratios.
With the expectation of at least one more rate cut this year, we expect downside risks to NIM to be slightly offset by better deposits mix with the release of excess fixed deposits, lagged effect for loans to be repriced downwards and a potential rise in volumes.
UOB remains as our top pick because of its exposure to trade war effects being relatively muted as compared to its peers. We are attracted to its defensive traits and steady earnings with high visibility. As of 2Q19, UOB’s profit before tax arising from Greater China and Hong Kong loans is 13% (DBS: 27% and OCBC: 20%) (Figure 14).