• Concerns on asset quality will be on the cards this quarter; keep watch on regional weakness
• SIBOR uplift may be offset by regional funding cost pressure; NIM uptick may be limited
• In slower gear ahead; banks still need to rely on regional operations in the longer term
• OCBC is our pick in the sector
Mixed quarter expected
With SIBOR higher by almost 30bps q-o-q, one would expect a bumper quarter for NIM. However, regional funding cost pressures and excess liquidity conditions may wipe out most of the NIM uplift. And as a result, NIM uptick for 3Q15 is likely to be muted. Loan growth is expected to be soft q-o-q, judging by statistics observed up to Aug-15. Regional operations (ASEAN in particular) have moderated as banks have taken a cautious stance on growth. Noninterest income would be mixed across the banks. UOB should see a better quarter after a weak 2Q while OCBC may see a slight dent to its insurance income due to marked-to-market losses as credit spreads narrow. Separately, UOB may see higher expenses during the quarter. Overall, 3Q15 will not be an exciting quarter.
Asset quality, the common item to watch across banks
NPLs might arise from ASEAN-centric operations, namely Malaysia and Indonesia. Provisions in 2H15 will be at best flat if not higher vs 11bps recorded in 1H15 and we believe banks will continue to take a prudent stance to set aside buffers for uncertain times. UOB’s provisions could end up flat from 2Q15. Although specific provisions should be lower in 3Q15 (recall that it booked additional provisions in 2Q15 for selected exposures), it will continue to build up general provisions. OCBC’s provision levels and NPL ratios have stayed low. We would not be surprised if it inches in coming quarters. We note that OCBC’s Greater China books remain healthy and direct onshore exposure remains small.
Slow growth ahead
Loan growth has been sluggish and such trends may be prolonged, even till next year. For 2015, we expect loan growth to stay below 5%. There could be downside risk to growth in 2016.
Still prefer OCBC
Singapore banks are over-owned in comparison with ASEAN peers, which have been unloved for the past quarter at the very least. But when we weigh the respective strength of the banks, Singapore banks remain an Overweight within our ASEAN banks and Singapore universe. We continue to prefer OCBC over UOB for its relatively healthier asset quality, potential traction from its Greater China expansion and its wealth management platform. (Read Report)
Source : DBS Group Research