● Downside risks to loan growth prospects for Singapore banks
appear to be increasing
. Apart from the slowdown in ASEAN
macro demand and Singapore mortgage growth, offshore trade
loan book might shrink further in the near term.
● System trade loans booked in Singapore and HK have doubled since
2010. Many structural and speculative drivers are now reversing
(YTD and into 2Q15): (1) across the board fall in commodity prices,
(2) narrowing of the onshore-offshore rate spread in China (narrowed
to zero in 2Q15), and (3) weaker regional currencies + lower onshore
rates dampen offshore demand.
● Trade loans are roughly 15-20% of Singapore banks' group loan
book and have been one of the key drivers of loan growth. DBS
and OCBC appear to have a higher proportion of the arbitrage
driven loans and face higher downside risks to loan growth.
● Both DBS and OCBC are likely to face volume and NIM risks from
the Greater China exposure again in 2Q15, before the impact of
better Singapore NIMs (driven by SIBOR) becomes more obvious.
UOB remains our top pick in the near term.
System trade loans have doubled in SG and HK since 2010,
but the drivers are now reversing
Growth in offshore trade loans have been a major driver of system
loans in the post GFC period. In Singapore, the growth has been
driven by increased flows within South Asia as well as corporates
trying to make use of lower USD interest rates. In Hong Kong, the
main driver has the liberalisation of offshore RMB settlement as well
as speculative arbitrage trade to make use of the forex movements
and offshore-onshore rate differentials. Apart from the overall slowing
macro, most of the speculative trends seem to be reversing as well.
RMB offshore-onshore rate spreads continues to narrow
The onshore-offshore spread is almost zero, narrowing significantly in
2Q15 – likely triggering further shrinkage in the arbitrage trade, which
is estimated to be 20-30% of the book. Going by recent trends, DBS
and OCBC appear have a higher proportion of the arbitrage book
compared to UOB, which surprisingly is still growing its trade book.
DBS and OCBC have seen a bigger slowdown recently
Interestingly, UOB's trade book has been more resilient recently,
partly because of a lower proportion of arbitrage trade
. UOB also has
the capacity to grow USD loans more aggressively with a low USD
LDR of 58% (DBS 102%, OCBC 82%). (Read Report)
Source : Credit Suisse Asia Pacific Equity Research
Labels: Banks, DBS, OCBC, UOB