Singapore Banks (KimEng)

Event

We expect the strong YoY loan growth trend for Singapore banks to have persisted in 2Q, which would lift management guidance and consensus expectations for the sector this year. DBS will be the first to report its results this Thursday, followed by OCBC on 4 August and UOB on 12 August. Positive variance could also come from lower-than-expected loan provisions. We maintain our positive view on the sector.

Our View

We maintain our view that net interest margins will remain depressed longer than the market expects, till at least 2012. The thin margins, however, will be compensated by the continued strong loan growth. This year’s January-May figures for total Singapore system loans showed a 20% YoY growth, against the banks’ earlier guidance of low mid-teens growth for FY11.

All three banks are well-covered in terms of provisioning, (with allowances more than 100% of NPLs). With a healthy economic outlook, we expect to see a smaller percentage of loan charge-off or in the case of UOB, perhaps a write-back. On the other hand, trading income/investment banking fees for the banks could disappoint against a high QoQ base, given the weak market conditions in 2Q11. DBS is the most at risk here, given a high proportion of income.

We anticipate a focus on regional growth initiatives, given that all three Singapore banks are prospering in the domestic market. We expect healthy YoY profit growth for 2Q11, though not QoQ. Our 2Q net profit forecasts for the three banks are as follows – DBS $719m, OCBC $618m and UOB $660m.

Action & Recommendation

The better clarity following MAS’s recent announcement on capital requirements is positive for the sector. We believe it gives the local banks better capital planning outlook and the opportunity to take a slightly more aggressive stance. The ensuing better ROE profile vis-à-vis international peers could be a positive catalyst going forward. We adjust our profit estimates by about 1-2% to account for better loan growth. Maintain BUY on OCBC and DBS, and HOLD on UOB. Our top pick remains OCBC for its better growth profile.