Singapore Banks Sector, cimb
=Slipping deposit pool
=Two points to highlight in May’s bank stats are: 1) a shrinking deposit pool, with May 14 total deposits lower yoy – a phenomenon not seen since SARS (1Q03); 2) good loan growth to businesses and FIs making up for slack mortgages (+2.5% YTD) and consumer loans. With deposit competition a key concern, our top pick is DBS, as its larger CASA base provides shelter.
=What Happened
=Healthy loan growth. MAS banking data for May showed healthy YTD DBU loan growth of 4.1% (Apr: 2.9%), broadly in line with the banks’ guidance of high single-digit to low-teens loan growth for the full year. The 1.1% mom loan growth was led by business loans (+1.6% mom, +6.3% YTD), building and construction loans (+1.1% mom, +3.1% YTD) and mortgages (+0.7% mom, +2.5% YTD). Meanwhile, consumer loans shrank 0.2% mom and 0.2% YTD as demand for car loans and share financing continue to fall.
=Deposits shrank, LDRs crept up. A worrying trend that appeared in May is that DBU deposits shrank (-0.8% mom, -0.2% YTD), led by an outflow of fixed deposits. We have to go back to as far as Mar 03 (SARS) to find a yoy decline in system deposits. As loan growth continues to outpace deposit growth, DBU LDR is up (May:111%, Apr:109%), so is S$ LDR (May:84%, Apr: 83%).
=What We Think
=A shrinking deposit pool is worrying as banks will have to compete aggressively for a shrinking pie, hiking up funding costs for all. The concern is accentuated with the new LCR requirements, especially for the foreign banks who need to offer attractive rates to compete. If higher rates merely poached time deposits from the local banks, it would not be a worry. However, recent CASA packages suggest that the local banks are equally wary of CASA slippage.
=What You Should Do
=We maintain our Overweight call on the sector as the banks seem to be able to pass out higher funding costs to loans. DBS is our top pick, as its large CASA base (DBS: S$121m, OCBC: S$44m, UOB: S$48m) will allow it to remain relatively sheltered from impending deposit competition.