Broker's take: CGS-CIMB expects Singapore banks to benefit from pick-up in credit growth this year

CGS-CIMB has reiterated its "overweight" call on Singapore's banking sector in anticipation of a pickup in business activity and credit growth in 2021.

This is expected to be driven by the easing of social distancing measures in Phase 3 and the ongoing Covid-19 vaccination programme, both of which commenced recently in December 2020, said analysts Andrea Choong and Lim Siew Khee in a report last Thursday.

All three banks have been maintained at "add" with DBS, OCBC and UOB given target prices of S$28.35, S$12.52 and S$27.72, respectively.

The analysts named UOB as its top pick among the three banks as they foresee its net interest margin (NIM) to sustain or trend upwards, a reversal compared to its peers. Asset quality visibility underpins their expectations of lower credit costs for the bank in the near term.

They are also forecasting DBS to report lower impairments, and OCBC's non-performing loans to trend upwards to 2.5-3.5 per cent in FY21.

Ms Choong and Ms Lim's bullish sector stance comes after Singapore's bank lending ticked up in November 2020 to reverse an eight-month decline on continued growth in consumer loans.

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Based on the November data from the Monetary Authority of Singapore, they note "encouraging" growth in Singapore's industrial production index which rebounded year on year to 17.9 per cent from the 0.8 per cent year-on-year decline the month before, attributed to favourable base effects and a strong sequential lift of 7.2 per cent month-on-month (m-o-m) seasonally adjusted versus -19 per cent m-o-m seasonally adjusted in October 2020.

They also observe a moderation in Domestic Banking Units deposit growth, which halved month on month to 0.7 per cent as volatility from the US presidential elections dissipated in November 2020. This has further compressed Singapore's system loan-to-deposit ratio (LDR) to 91.9 per cent from 100 per cent in March 2020.

In particular, the analysts highlight how average quarterly benchmark rates have declined by the smallest quantum in over a year. Over Q4 2020, the Singapore Interbank Offer Rate, or Sibor, and London Interbank Offer Rate, or Libor, declined three basis points (bp) each to 0.41 per cent and 0.22 per cent respectively. The Swap Offer Rate, or SOR, dipped one bp to 0.18 per cent.

Ms Choong and Ms Lim view this "stark moderation" in compression, versus the peak declines of about 83-93 bp in Q2 2020, as an indication of stabilisation in Singapore banks' NIMS going into the year.

"We remain cognisant that lower LDRs could compound pressures from weaker NIMs on banks' earnings, but a pickup in credit growth from the easing of social distancing measures (as Singapore rolls out the Covid-19 vaccines in FY21F) could allay these concerns," said the analysts.

As at 11.03am, shares in DBS were trading S$0.08 or 0.3 per cent higher at S$25.12, OCBC was down S$0.02 or 0.2 per cent at S$10.04, and UOB shares were trading S$0.03 or 0.1 per cent lower at S$22.56.