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Singapore banks may dial down loan growth targets but still outperform broader market: analysts

Coupled with uncertainty over the 2023 outlook, investors will likely take a cautious stance on bank stocks.

Rising uncertainty is clouding the outlook for banks in Singapore, as subdued growth in banking system loans point to headwinds for loan growth targets, note RHB Group Research analysts.

Among the three local banks, RHB’s top picks are DBS Group Holdings and Oversea-Chinese Banking Corporation (OCBC). In an Oct 6 note, RHB is maintaining “overweight” on the banking sector here, with “buy” calls on DBS and OCBC and target prices of $37.60 and $13.90 respectively.

Meanwhile, RHB is “neutral” on United Overseas Bank (UOB) with a target price of $29.30.

Singapore’s banking system loans ticked up 0.5% m-o-m in August, with growth for 8M2022 at an annualised 1.1%. Lending by commercial banks, which reported similar growth rates, was led mainly by the business segment, note RHB.

The 1.6% annualised increase in business loans was driven mainly by the building and construction sector (up 4.4%, annualised), as well as financial and insurance activities (up 2.8%, annualised). According to RHB, these helped offset declines in loans to the manufacturing (down 4.4% year-to-date) and transport, storage & communications (down 2.2% ytd) sectors.

The consumer segment, however, was flattish (down 0.1% ytd), with decent housing and bridging loans (up 2.5% ytd) offset by car loans (down 5.5% ytd) and others (down 5% ytd).

“The Monetary Authority of Singapore’s (MAS) August banking system loans and deposits data lead us to believe that Singapore banks may likely dial down their FY2022 [ending December] loan growth targets, as well as refine their guidance on net interest margin (NIM) sensitivity to interest rate changes when they report 3QFY2022 results,” write RHB analysts.

Coupled with uncertainty over the 2023 outlook, investors will likely take a cautious stance on bank stocks, add the analysts. “That said, DBS and OCBC, beneficiaries of rising interest rates, would still outperform the broader market, in our view.”

CASA attrition continues 

Banking system customer deposits expanded by a healthy 7.7% ytd to August, or an annualised 11.5%. Rising deposit rates — on the back of steep increases in US interest rates — have not only attracted more funds into the banking system, but also led to a sustained shift out of current account savings account (CASA) deposits to fixed deposits (FDs).

For 8M22, CASA deposits contracted by 7.5% ytd while FDs surged 42.2% ytd. The CASA ratio eased to 58.7% in August, from a high of 68.3% in December 2021.

The CASA ratio, at 58%-59%, is almost back to pre-pandemic levels of 57%-58%.

Banks here have been guiding for mid-single-digit loan growth in 2022. The banking system’s 8M2022 loan growth suggests that achieving these targets would be a challenge, write RHB. “We believe loan demand would remain subdued in the near term, as borrowers fret over rising interest rates and the uncertain 2023 outlook, while banks continue with their cautious credit underwriting stance.”

Meanwhile, property cooling measures announced on Sept 29 would lead to a further moderation in residential property loans in 2023, add RHB. The research house’s property analyst believes that the latest measures would slow down transaction volumes (namely HDB unit resales), have a slightly negative impact on mass market volumes and marginal slowdown on private property prices.

Improving, advancing and driving transparency 

In a series of reports on Oct 5, Maybank Securities Research analyst Thilan Wickramasinghe ranked the three banks according to the research house’s “enhanced ESG 2.0 methodology”.

DBS fared the best, with Wickramasinghe praising the bank’s “high levels of ESG disclosures, plus dividends”. He maintains “buy” on DBS with an unchanged target price of $42.18.

“DBS has published a clear, science-based approach to achieving net zero. By 2023, the group plans to disclose decarbonisation transition pathways and set interim targets for 2030. While it publishes Scope 3 operational emissions, disclosure of financed emissions are at an early stage. However, DBS is targeting detailed reporting by 2024,” he notes.

DBS has increased sustainable investing assets under management (AUM) for its private banking products to 53%, compared to a previous target of 50%, by 2024. A significant portion of its financial inclusion strategy is based on digitised banking access. According to Wickramasinghe, risks here from disruptions and cyber-security need to be watched.

Wickramsinghe expects improving prospects for DBS’s net interest income in 2HFY2022 as asset re-pricing accelerates supported by the Fed’s rate hikes. “We believe there are significant upside risks to dividend payouts going forward as the group looks to return excess capital. Asset quality is a key risk, especially from North Asia, but the group’s strong portfolio and provisioning provides a significant buffer.”

Meanwhile, UOB is “advancing transparency” with “strong disclosures”, notes Wickramasinghe. That said the bank needs to chart a “clearer path to net zero”.

Wickramasinghe is maintaining “buy” on UOB with an unchanged target price of $32.28.

“The group’s pathway towards net zero and interim targets are not clear, unlike peers such as DBS… At the same time, increasing the proportion of independent directors at the board as well as raising diversity (only 20% of the board is female) could further strengthen governance, we believe. Separately, we believe UOB’s investment in technology as well as its large, SME client base gives it significant opportunities for enhancing financial inclusion across the region,” he writes.

UOB’s gearing towards secular Asean growth, driven by domestic consumption as well as North-South supply chain shifts, should support medium-term earnings visibility, adds Wickramasinghe.

Finally, OCBC’s ESG disclosure levels “could be better”, writes the Maybank analyst. He maintains his “buy” call on OCBC with an unchanged target price of $14.39.

OCBC has successfully deployed $34 billion of sustainable financing, making good progress on its $50 billion by 2025 target, notes Wickramasinghe. It has also set targets to reach carbon neutrality from its operations by 2022.

“In contrast, there is limited disclosure on the group’s intended pathway towards net zero or a timeline… We believe more disclosures are needed in areas such as waste and recycling. Similarly, there are limited disclosures on senior management rewards structures for achieving ESG targets. Clarity here would be critical for transparency on the group’s overall sustainability strategy, in our view,” says Wickramsinghe, adding that there are limited details on OCBC’s pathway to capture financed emissions.

Nevertheless, Wickramsinghe says the strong NIM improvement momentum OCBC delivered in 1HFY2022 should flow through to 2HFY2022 as Fed rate hikes “get further baked in”. “At the same time, the group’s gearing towards North-South supply chain and wealth flows gives it earnings visibility. China re-opening could be a near term upside catalyst. Asset quality remains benign so far, but slowing macro conditions increasing provisioning costs need to be watched.”

As at 12.52pm, shares in DBS are trading 33 cents higher, or 0.99% up, at $33.75; while shares in UOB are trading 24 cents higher, or 0.91% up, at $26.74; and shares in OCBC are trading 4 cents higher, or 0.33% up, at $12.03

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