Banks’ net interest income entering low growth phase.
The Singapore banks’ Asian markets are in a credit cycle contraction and Singapore banks have less ability to stretch the already high Loan-To-Deposit Ratios (LDR) further to boost net interest income growth. In this situation, a rising interest rate would likely worsen performance rather than improve it. We expound the following two key risks to a muted net interest income growth:
OCBC: Lowest LDR among the local banks as at 3Q16; but waiting to strike
OCBC’s LDR improved to 83% in 3Q16 after it hit a high of above 88% in 2Q13. Despite having relatively more room to leverage, we expect OCBC to conservatively manage its loan and deposit volume/rates dynamics to maintain LDR at c80%. We expect OCBC’s defensive stance to result in weak net interest income growth in 2017 but the defensive strategy is in line with a contracting credit cycle.
Figure 1: OCBC’s Net Interest Income q-o-q growth and LDR
Source: Company, PSR
UOB: Lending aggressively to riskier borrowers to support net interest income growth
In our previous UOB 3Q16 earnings report, we indicate that UOB was willing to accept higher yields from riskier loans. UOB has the highest average All Currency Liquidity Coverage Ratio (LCR) of 148% by 3Q16 (OCBC: 133% and DBS: 115%). Minimum All Currency LCR required by regulation will be 80% by 2017. As of 3Q16, UOB also have a coverage ratio of 111%, above DBS’ 100% and OCBC 101% (See Figure 6). With higher LCR and coverage ratio compared to peers, we suspect UOB is attempting to manage an optimal balance between higher yields from riskier loans and a high LDR c.85% to keep net interest income growth positive. But the corollary would be the resulting net interest income growth is able to feed the higher provisions needed for the riskier loans.
Figure 2: UOB’s Net Interest Income q-o-q growth and LDR
Source: PSR, company
DBS: Highest LDR among the banks; likely to seek growth from acquisitions
DBS had pushed its LDR up aggressively since 2010 and it is at 89.5% as of 3Q16, the highest amongst the Singapore banks. We believe DBS’ aggressiveness to drive up performance by maintaining high LDR could leave it more vulnerable to liquidity risks and less bandwidth to manage a stable net interest income growth. However, we can expect some support from DBS’ acquisition of ANZ’s wealth management and retail banking business in Singapore, Hong Kong, China, Taiwan and Indonesia. The acquisition provides DBS access to additional S$11bn worth of customer loans, representing 3.74% of DBS’ customer loans and S$17bn worth of customer deposits, representing 5.24% of DBS’ customer deposits. The acquisition is slated for progressive completion from 2Q17 to early 2018. We also expect DBS’ acquisitive trail to continue in order to bolt on more deposits and loans to grow net interest income if they decide to defy the credit cycle contraction in their Asian markets.
Figure 3: DBS’ Net Interest Income q-o-q growth and LDR
Source: PSR, company
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