• January’s domestic loan growth remained flat at 3.16% YoY, held up by building and construction loan while mortgage growth was the slowest in seventeen years.
• January’s domestic deposits rose 4.8% YoY, boosted by fixed deposit growth of 15.1% YoY, the fastest in eleven years.
• February’s 3-month SIBOR is still rising. It is now 1.953%, surpassing last month’s 11 year-high.
• Hong Kong’s January loan growth remained flat at 3.1% YoY.
• Maintain OVERWEIGHT for the Singapore Banking Sector.

Singapore’s January domestic loan growth flat at 3.16% YoY (Dec: 3.04% YoY)

January’s domestic loans growth was held up by business loan growth of 4.8% YoY. Growth was mainly attributable to Building & Construction’s robust loan growth of 13.8% YoY, the fastest since May 2016. These are drawdowns of loans from existing projects in the pipeline. We expect growth for new construction projects and mortgages to slow down in end 2019 due to property cooling measures. Meanwhile, consumer loan growth weakened to 0.82% YoY due to mortgage weaknesses. Mortgage growth decelerated to 1.6% YoY, the slowest in seventeen years. Due to worsening macro-economic conditions, we expect loan growth for the banks to slow to 4-6% for FY2019e as compared to 7-11% in FY2018.

Singapore’s January domestic deposits grew 4.8% YoY, the fastest in 1.5 years (CASA contracted 1.1% YoY; Fixed deposit expanded 15.1% YoY)

In a rising interest rate environment, the banking industry has been aggressively plumping up their fixed deposits. Singapore’s fixed deposits registered the highest growth in eleven years at 15.1% YoY as compared to FY2018’s monthly average growth of 1.6% YoY. Government & Statutory Authorities’ deposit growth surged a massive 44.0% YoY, at levels unseen since August 2011. As the financial sector bulks up in pricier fixed deposits, the corresponding rise in cost of funds makes it a constant challenge for the banks manage costs well enough to achieve NIM expansion. January’s proportion of fixed deposits and CASA as a percentage of total deposits are 40% and 60% respectively.

Hong Kong’s January loan growth flat at 3.1% YoY

Hong Kong’s January residential sales and purchase value and volume spiked 86.6% and 120.5% MoM respectively. Home prices in Hong Kong have started to roll-over (Figure 7). Since the peak in July 2018, prices have softened by 9.4% in January 2019. Higher interest rates should support the banking sector’s profitability.

February’s 3-month SIBOR reached 1.953%, surpassing last month’s 11 year-high.

3-month SOR expanded 10bps MoM to 2.039%. Meanwhile, the savings rate in Singapore remained unchanged at 0.16%. With loans pegged to floating and fixed rates taking months and years respectively to reprice, we will continue to see NIM expansion even if there is a pause in interest rate hikes. However, given the recent dovish tone set by the US Federal Reserve, we do not expect interest rates to rise as fast as it did in 2018. We reduced our FY19e NIM estimates for the three banks by c.3%.

Investment Actions

Maintain Singapore Banking Sector at overweight. Higher NIM, low provisions and better cost management should provide upsides to ROE improvements. The banking sector gives an attractive dividend yield support of c.5%. All three banks’ robust CET-1 ratios should sustain current pay-out ratios.  Key risks include (i) lower pass-through of interest rates; (ii) lesser U.S. Federal Reserve rate hikes; (iii) market volatility continues to pressure Treasury Market revenues downwards; (iv) weaker sentiments due to trade tensions.