Outlook for S’pore banks looking good

SINGAPORE - Neither the exuberance infecting Wall Street nor the traditional year-end buying mood for equities has rubbed off on local blue chips yet.

If anything, the benchmark Straits Times Index found itself clinging precariously to the 3,200 support level for most of this week before losing its footing yesterday to end 24.85 points down at 3,177.25.

And there appears to be nothing in sight to prod the STI higher. The banks, which make up about 40 per cent of the index, reported sterling third-quarter results, yet they were still largely within expectations, so there were few fresh catalysts to energise traders. But some research houses are optimistic that the outlook will brighten for banks in the coming year.

CIMB Securities research head Kenneth Ng said in his latest report: "The third quarter was about how the banks lost out or benefited from the unexpected United States Federal Reserve's move of not tapering (its stimulus measures)."

Core banking trends posed few surprises and net interest margins had stabilised, while there is no significant deterioration in the credit quality of the (local) banks' loan books, he added.

But he is hopeful that bank profitability will pick up: "We raise the sector to overweight from neutral after an upgrade of United Overseas Bank (UOB)."

Although banks as a group have beaten the STI this year, their valuations are still not excessive and the steady delivery of earnings has made Mr Ng more positive about the sector.

What is heartening is also the pick-up in US-dollar deposits and loans. This shows that the Singapore banking system is now more about funding Asian trade and less about the domestic market.

Mr Ng said: "In particular, the ability of DBS to meet estimates even as it was hit by a shortfall of $71 million in earnings from wrong bets on a US taper suggests that core profitability of the sector is better than expected."

There is also little risk of UOB, for instance, overpaying for a Hong Kong acquisition such as Wing Hang Bank, he added.

Although Barclays Equity Research kept its neutral call for Singapore banks, analyst Sharnie Wong noted that the three lenders have been preparing for tapering uncertainties by boosting their deposit bases.

She said: "The three Singapore banks grew deposits faster than loans quarter on quarter in the third quarter. The unexpected delay in the quantitative easing by the Fed had impacted margins as banks attracted time deposits and maintained surplus liquidity."

However, the lower loan yields and lower loan-to-deposit ratios were partly offset by a greater demand for wholesale funding, which the Singapore banks could access at a low cost due to their strong credit ratings.

Ms Wong also noted the keen interest by OCBC and UOB in expanding into Hong Kong, which they see as the gateway to mainland China.

"UOB's management said that it believes pricing is a key consideration and the establishment of free trade zones in China may potentially be a longer-term threat to trade volumes through Hong Kong," she added.

For OCBC, however, a presence there makes sense only if it is part of a broader trend triggered by China driving economic growth in Asia and creating a vibrant offshore yuan market with Hong Kong as the largest centre, she added.


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