• Singapore banks’ high Loan-To-Deposit Ratio amid credit cycle contraction indicates performance has peaked and are entering a phase of low net interest income growth.
• Rising non-performing loans amid weak net interest income growth implies weaker ability to set aside provisions to increase coverage ratio.
• Debt overhang adds headwind to loans growth while rising interest rates lowers credit quality.
• Expectations of a strengthening USD weakens demand for USD loans by Asian borrowers.

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:

1. Expectation of higher deposit rates amid impending US Fed rate hikes and intensified competition. Higher interest rates would make depositors more sensitive to deposit rates relative to other aspects of banking services. We opine that the Singapore banks’ LDRs are still trending on a high side therefore they have less bandwidth to lose deposits faster than loans. We expect periodically intense price competition for deposits if LDRs remain elevated. Therefore deposit rates should have more upward bias relative to loan rates, and negatively impact net interest income.
2. Deleveraging as loans shrink and deposit rise. As interest rates increase, demand for credit could fall further and deposits rise as rates become more attractive. The Singapore banks’ LDRs have a stronger downside bias due to the fact that it is now on the high side. A falling LDR would further weigh against net interest income growth while rising interest rates would add a double whammy wherein non-performing loans (NPLs) growth accelerates.

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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