CGS International analysts Andrea Choong and Lim Siew Khee are keeping their “neutral” call on Singapore banks as investors have priced in a positive outlook on net interest margin and wealth management in FY2025.
Banking system loan growth stood at 1.5% y-o-y in October 2024, noticeably stronger than the mostly flattish growth seen over January to September this year. This is likely driven by positive investment sentiment following the US Federal Reserve (Fed) rate cut in September, Choong and Lim say.
The positive expansion was contributed by resident loans which rose 2.7% y-o-y, but partially offset by a 0.7% y-o-y pullback in non-resident loans.
Within the domestic space, business loans to the transport, storage and communication sectors, which rose 14.2% y-o-y, contributed most to the growth. This is followed by the building and construction sector, which grew 3.3% y-o-y.
According to Choong and Lim, the contraction in regional loans was broad-based, led by a contraction in loans to the agriculture, mining and quarrying sectors as well as manufacturing sectors which saw a 12% and 8.4% y-o-y decrease, respectively.
Regional consumer loans also fell 2.3% y-o-y.
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While expectations of the quantum of Fed rate cuts have eased following the US presidential election outcome, Choong and Lim believe that the soft tapering of interest rates should still bode well for banking system loan growth in FY2025.
To this end, Singapore banks are guiding for mid-to-high single digit loan growth in FY2025, as compared to low single digit growth in FY2024.
In October, bank system loan growth appeared to stabilise, growing 3.9% y-o-y. Net inflows of Singapore dollar deposits, which rose by 4.7% y-o-y, edged out foreign-currency placements, which grew by 3.2% y-o-y.
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Amid the tapering interest rate environment, current account savings account (CASA) balances continued to grow, increasing 4.4% y-o-y, outpacing fixed deposits (FDs), which experienced a 3.4% y-o-y growth.
While the split of system CASA and FDs remained steady at 50:50, Choong and Lim expect this to start tipping towards more CASA in the system, as more interest rate cuts materialise.
“System liquidity stayed ample. All-currency loan-to-deposit ratio (LDR) was stable at 68.4% in October 24,” Choong and Lim add.
Choong and Lim have kept their “add” calls on Overseas-Chinese Banking Corporation (OCBC) and United Overseas Bank U11 (UOB) with target prices of $17.70 and $39.50, respectively.
In their view, OCBC’s common equity Tier 1 (CET-1) ratio of around 16% as at end 2QFY2024 ended June remains the bank’s “key advantage” for mergers and acquisitions (M&As) or to cushion against asset quality deterioration.
With UOB, Choong and Lim believe that write-backs of management overlays are unlikely unless asset quality concerns due to the elevated interest rate environment blows over.
Meanwhile, Choong and Lim maintain “hold” on DBS Group Holdings with a target price of $43.
“We estimate DBS Group had $2 billion in management overlays as at end-2Q2024. The asset quality risks of its onshore Mainland China property exposure (less than 1% of group loans) remain contained, in our view, as the majority of its loans are extended to China state-owned enterprises,” Choong and Lim add.
As at 11.36am, shares in OCBC, UOB and DBS are trading at $16.25, $36.39 and $42.60, respectively.
