Singapore Banks: Weak manufacturing to keep provisions high
By DMG Research
We are Neutral weight on Singapore banks. The share prices of banking counters have risen sharply since the Mar 09 lows, and this has factored in a strong V-shape economic recovery. Current indicators, however, do not suggest the economic recovery will be V-shaped.
We expect banks to make sharply higher 2009 provisions. DBS, which has a greater dependence on manufacturing loans, is at higher risk of more provisions given the continued weakness of the Singapore non-biomedical manufacturing space.
Hence, we would SELL DBS (Target: S$10.80). We are NEUTRAL on OCBC (Target: S$6.20) and UOB (Target: S$14.20). For investors who want to be exposed to Singapore banks, UOB is our preferred due to its higher asset quality – its strong expansion in low-risk housing loan portfolio is a plus.
Loans to weaken further
Loans growth typically lag economic growth by 6-12 months, and we do not see an exception this time round. Based on our forecast of a sharp 7.2% Singapore GDP contraction for 2009, loans growth will be muted for quite a few quarters ahead, following the recent May 09 growth of 5.5%.
Despite the recent soft Singapore Interbank Offered Rate (SIBOR), OCBC and UOB were able to widen their 4Q08 and 1Q09 net interest margin (NIM). Less loan competition from foreign banks contributed to this widening. Looking ahead, we believe their NIMs could remain wide for the same reason. For DBS, however, its low Sing dollar loan deposit ratio in an environment of soft SIBOR would cap NIM widening. We forecast DBS 2009 NIM of 2.03%, flat versus 2008’s 2.04%.
Increased securities market activities will help 2Q09 earnings, but outlook for 3Q09 unexciting. May 09 securities market average daily turnover (ADT) was a strong S$2.27b, but this fell to S$1.64b in Jun 09. We believe the activity spike in Apr/May 09 was a blip and the sustainable level is much
lower.
Provisions remain the key earnings' dampener, particularly for DBS.
Singapore's May 09 manufacturing output (excluding biomedical) remains weak, and contracted 17.7% YoY. Amongst the banks, DBS was the most aggressive in manufacturing loans over the past 3 years, with a 23.4% CAGR, versus OCBC's 12.4% and UOB's 6.7%. Manufacturing account for a significant
12.8% of DBS' total loan book, higher than OCBC's 7.9% and UOB’s 9.7%. We expect 2009 provisions to be higher for all three banks, but the risk for DBS is sharply higher, given its loan profile.
Disclaimer
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