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OCBC, CS: DBS—the Silver Lining among SG Banks as Singapore Economy Slows
DPM Tharman: Prepare For a Long Slowdown
Recently, Singapore’s Deputy Prime Minister shared that the Singapore economy is be entering a tough period that will likely last for a while, with growth potentially hitting below the two percent mark. In August, the Singapore Government shaved its full-year growth forecast to between 1-2 percent.
The GDP figures released for 3Q16 showed that the Singapore economy is in for a long slowdown as Singapore’s GDP grew by 0.6 percent, much lower than the forecast of 1.7 percent by private sector economists. The SGD slipped lower against the USD (from 1.3313 about a quarter ago to the current 1.39) as MAS holds back on monetary easing and keeps local interest rates low.
Loans Remained Lacklustre; Low Single-Digit Growth
Not surprisingly, lending continues to be fairly lacklustre as the economy slows down. Loans have declined for eight consecutive months, the longest streak of contraction since 2005. Based on the latest number, system loans contracted 5.2 percent year-on-year, despite a one percent month-on-month improvement in Aug.
Headwinds from Weak Business and Consumer Sentiment
Loans to businesses fell by 7.5 percent year-on-year, with declines led by manufacturing (-6.4% year-on-year), general commerce (-17.7% year-on-year) and others sectors (-27.7% year-on-year). Consumer loans were insipid, mainly weighed down by lesser housing loans from headwinds in the domestic property market. The figures reflect the weak business and consumer sentiment in Singapore’s economy and highlight the headwinds for the three local banks moving forward.
Banking Sector Challenged By a Spate of Negative Events
On top of the weaker macro outlook, banks were hit by a spate of negative news from the local oil & gas sector. This resulted in a spike in impairment charges in 2Q16 as well as higher NPL ratio. Apart from the oil & gas sector, banks’ exposures to the commodity and property sectors also came under scrutiny together with exposures to Chinese and European loans. Share prices of banks took a dip to correct for the weakened sentiment and market outlook.
Investor Takeaway: Focus on High Quality Bank (i.e. DBS)
Credit Suisse suggests that investors look to invest in banks that exhibit characteristics which allow them to out-perform in the medium to long-term relative to their domestic peers.
These characteristics are (1) a focus on retail/commercial, (2) domestically orientated businesses rather than pan-regional business models, (3) an observable cost of funds advantage relative to peers (i.e. a strong, stable funding base with high proportion of retail savings and CASA) and (4) well capitalized with strong CET 1 ratio.
Among the local banks, DBS fits the bill perfectly. Furthermore, DBS is seen as having the most to gain from a hike in the US Federal Reserve interest rate. Most of the negatives have already been priced into the stock as the share corrected from its 52-week high of S$18.25 to the current level.
DBS: BUY, TP $17.30
