SG Banks

SG Banks: Barclays is positive on Singapore Banks but believe the positivity is partially reflected in the recent run-up in valuations. The house downgrades UOB from Overweight to Equal-weight and upgrades OCBC from Underweight to Equal-weight, while keeping DBS as the top pick with Overweight. Singapore Banks are seen as positively geared to rising interest rates and defensive towards capital outflows due to its strong funding franchise, high household savings rate and strong credit ratings, giving them access to cheap funding. Specifically, rate hikes will drive positive margin returns. Rising rate environment is usually positive for banks, though with a time lag of about three months, as banks with less than 100% loan-deposit-ratio use excess funds generate higher returns. All three Singapore banks have SGD LDR less than 90%. In particular, DBS’s net interest margins are the most highly positively correlated with SIBOR due to its high exposure (est. 86%) to US-geared markets such as Singapore and Hong Kong. OCBC and UOB are more geared towards ASEAN peers, where interest rates are less related to the U.S. Singapore’s high domestic household savings rate, high concentration of wealth as well as its position as an offshore wealth management centre makes it well-placed among regional peers even in times of a global liquidity tightening. Meanwhile, asset quality is strong and with strong earnings since the Asian Financial Crisis, breakeven credit costs (when the pre-provision earnings is wiped out by bad-debt) of all the banks have risen. Home mortgage delinquencies should be low or tolerable given low unemployment rate and availability of the CPF scheme to finance housing loans. On capital management, DBS and UOB are well capitalized while OCBC plans to boost its core Tier 1 via divestments of non-core assets and earnings generation. Given its optimism in Singapore banks, the house raised TPs across all three banks. DBS is raised to $22.00 (from $19.00) UOB is raised to $24.10 (from $23.60) OCBC is raised to $10.70 (from $10.00)