• Singapore loans growth stabilised at 2.6% YoY in October
• Consumer loans contracted for the seventh consecutive month (-1.2% YoY), dragged by weakness in housing loans (-1.4% YoY)
• 3M SIBOR down 4bps MoM to 1.769%, while 3M SOR rose 2bps to 1.537%
• CASA growth continued its recovery to 1.4% YoY after contracting in the 1H19; while FD kept up its strong momentum at 19.7% YoY
• Maintain the Singapore Banking Sector at Overweight. The banks are offering dividend yield of around 5.0% and well capitalised.

Singapore’s loans growth stabilising

Latest statistics from MAS reported loans growth of 2.6% YoY for October, in line with YTD monthly average loans growth of 2.3% YoY. Business loans growth of 5.2% YoY offset some of the contraction in consumer loans growth of 1.2% (Figure 1). Building & construction loans (+6.4% YoY) held up growth due to the progressive drawdown of loans from existing projects in the pipeline. Consumer loans contracted for the seventh consecutive month, dragged by persistent weakness in housing loans contraction of 1.4% YoY due to property cooling measures. We expect loans growth for the Singapore banks to slow to 4-5% for FY20e due to dampened business sentiments from continued macroeconomic weakness.

Deposits – FD kept up the momentum while CASA growth recovered from contraction

In September, CASA growth continued its recovery to 1.4% YoY after contracting in the first half of 2019. FD kept up its strong momentum at 19.7% YoY in October, outpacing overall deposits growth of 8.5% YoY (Figure 2).

Following interest rates cuts in the U.S., banks in Singapore lowered their fixed deposit rates (Figure 3). We reiterate our expectations of easing competition for FD in 2020 due to further rate cut expectations and slower global economic growth. As the banks release excess FD, funding pressure should ease and offset some of the impact of lower interest rates.

Despite the recent Fed rate cuts and downward adjustments 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 November and October was S$44mn and S$51mn respectively, down from the peak of S$457mn in February and YTD average of S$252mn.

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 1.56% for a 12 months tenure for SSBs.

3M SIBOR down 4bps MoM to 1.769%, while 3M SOR rose 2bps to 1.537%

Meanwhile, the savings rate in Singapore remained unchanged at 0.16% (Figure 5). The U.S. Federal Reserve’s easing monetary policy limits the upside for NIM expansion in FY20. 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 favourable backdrop for derivatives

SGX’s October total derivatives volume fell 24% YoY, and Derivatives Daily Average Volume (DDAV) fell 22% YoY to 0.855mn. October saw lower volatility as compared to the two most volatile months (May and August) this year when Trump unleashed his tariff hikes, as evident in DDAV spiking 54% and 33% YoY respectively.

1Q20’s total derivative volume and DDAV grew 14% and 12% YoY respectively. Meanwhile, 1Q20 SDAV came in at S$1.062bn and its YoY growth recovered to -1% as compared to the quarterly average contraction of -16% YoY in FY19.

Besides benefiting from the occasional volatility due to trade tensions between the U.S. and China, the underlying growth in demand for derivatives will be sustained by increasing interconnectedness and globalisation of markets.  SGX’s derivative products capture global flows and are not as reliant on local liquidity as the securities business.

Hong Kong’s loans growth inched higher at 7.0% YoY in October

Hong Kong’s loans grew at a respectable pace of 7.0% YoY despite high interest rates and lingering geopolitical tensions. Residential sales and purchase value in October rose 47% MoM and volumes grew 16% MoM. Home prices in Hong Kong recovered back to levels similar to a year ago (Figure 11). Meanwhile, 3-month HIBOR rose 19bps MoM to 2.355% (Figure 10).

Investment Actions

Maintain the Singapore Banking Sector at Overweight. The impact of the three interest rate cuts and slowdown in global economic growth should be offset by growth in fee income and other non-interest income from segments such as wealth management, deals and bonds. There is also a dividend yield support of c.5% for the sector.

Our top pick from the Singapore Banking Sector is UOB due to its (i) lowest exposure to Greater China and Hong Kong as compared to DBS and OCBC, (ii) low NIM sensitivity to falling interest rates, and (iii) defensive wealth management business which targets the mass affluent.

With the U.S. Federal Reserve’s easing monetary policy, 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.

Our recommendation will be subject to changes based on the following re-rating catalysts