Balance sheet balancing

Deploying liquidity could be a strategic advantage

Singapore banks are sitting on massive liquidity. How they deploy could determine profitability on the other side of COVID. DBS has been mostly parking excess at central banks, while UOB has increased its securities holdings. For the latter, this may provide a near-term margin boost. Ultimately, higher lending is the most desired option, but varying speeds of re-opening cloud near-term visibility. Yet, we expect ASEAN-5 growth to surge (+5.6% GDP) in 2022E, which should give the sector significant opportunities to participate – particularly with SMEs. UOB with stronger ASEAN integration and SME franchise could benefit the most, in our view.

Liquidity wonderland

The banks are sitting on deposits piled up due to government stimulus and QE during the pandemic. While we think deposit growth has peaked, the sector would need to deal with excess liquidity for a while. On a 1H21 YoY basis, all have stayed away from government debt – likely taking in to account tapering expectations early. Placing with MAS and central banks have been the most popular strategy with DBS deposits increasing 56% YoY and OCBC 20%. While risk-free, yields are low and NIMs could be impacted. We see US banks such as BofA (BAC US, USD46.28, NR) delivering 10% YoY higher 3Q21 NII, despite weaker loans from larger deployments towards corporate debt. Singapore banks have also been increasing allocations of investment securities with UOB’s rising 36% YoY. This may result in positive read-throughs to 3Q21 NII, in our view.

More loans, especially to SMEs

Loan growth could ultimately ease excess liquidity pressures. Currently, our checks suggest credit supply is crowded around large, investment grade customers. This is affecting pricing power. As vaccinations progress, and regional economies growing between 4-7% in 2022E, we expect credit demand to become broader – especially from SMEs and COVID frontline sectors. Post-GFC (2010-2012), SME loan growth outpaced system loans by 17ppts. We currently forecast Singapore banks loans to rise 7% in 2022E, but the risks are on the upside. We also expect Singapore base rates to be 21bps higher than 2020 from Fed tapering. We estimate every 10bps increase in the base rate could add 0.5-1.5% NPAT to the sector.

Liquidity, integration are regional advantages

We believe the sector’s excess liquidity is a strategic advantage as the region emerges from COVID. Importantly, 31% of deposits are in USD – essential for inter-ASEAN trade and North-South supply chain relocations. We believe UOB’s regional integration (one-third of wholesale banking income is already from cross-border) and strong SME franchise would be a clear beneficiary going forward. DBS and OCBC with their North-South franchise would also benefit.