So loan growths are expected to moderate significantly in 2H12, but which bank remains a relative outperformer in uncertain times?
According to DBS, it’s OCBC because ovf stronger asset quality indicators and minimal exposure to European debt securities.
Here’s more from DBS:
Macro conditions turning soft. The MAS expects Singapore growth to stall in early 2012 before a modest recovery in the latter half of 2012. The latest government forecast for 2012 GDP growth is just 1-3% (DBSV: 3.5%). At these levels, loan growth will undoubtedly moderate. We highlight that there is a 4-6 quarter lag effect on GDP vs loan growth. We continue to expect loan growth for banks to remain relatively strong in 1H12 but to slow considerably in 2H12. We have imputed 8% loan growth on average across the three banks for 2012, a significant slowdown from 26% in 2011.
Subdued earnings growth. While pressures on NIM remain particularly on the funding side, the impact is likely to be muted should lending spreads widen. However, as companies’ balance sheets are stronger now with lower gearing, the opportunities for banks to raise loan spreads is also lower. This implies that asset quality should remain healthy, in line with our view. We are not anticipating a turn in the credit cycle yet; we expect general provisions to moderate while specific provisions to gradually inch up. We are imputing an additional 5-10bps provision charge-off rate across the banks and further softening in non-interest income. All in, we now expect 5% core earnings growth for 2012 (2011: 6%).
Cheap but lacks catalyst; stick to OCBC. Macro and earnings headwinds are against the Singapore banks despite being the cheapest in ASEAN, trading at only 1.1x FY12 BV. Asset quality and capital levels, however, still remain the strongest among ASEAN peers. We keep our bet on OCBC (over UOB) for stronger asset quality indicators and minimal exposure to European debt securities. Despite the volatility from insurance contribution, its underlying business remains solid. OCBC has been an outperformer with relatively lower beta over the past 10 years. Maintain BUY for OCBC, TP trimmed to S$10.00 (1.6x FY12 BV) after earnings adjustments. UOB also remains a BUY but TP lowered to S$18.00 (1.3x FY12 BV) also after earnings revisions.
Do you know more about this story? Contact us anonymously through this link.