A pullback in loan demand in Jan 22
? System loans declined 1.6% mom in Jan 22, driven by a slippage in regional loans. A contraction in FI loans and personal loans were the key culprits.
? Deposits contracted a stark 1.3% mom in Jan 22 – almost all of which were in FCY. System liquidity is ample with c.82% LDR, but further outflows are likely.
? Reiterate Overweight. We understand that Russia/Ukraine exposures are minimal across Singapore banks. Prefer UOB for larger valuation upside.
Loan base contraction in Jan 22 erased gains over 4Q21
Banking system loans declined 1.6% (S$21.2bn) mom in Jan 22 – erasing most of the drawdowns seen over 4Q21 (+S$31.5bn). The contraction was driven by net repayments of non-resident loans (largely regional loans, -4.3% mom in Jan 22) as resident loans stayed flattish (largely domestic loans, +0.1% mom). In the non-resident loans segment, the 6.7% mom decline in loan balances for FI and insurance activities were responsible for almost all of the reduction in business loans in Jan 22 while a 11.7% mom drop in personal loans accounted for the shrinkage in consumer loans. Notably, these were both key growth drivers of non-resident loans in Dec 21. Contrastingly, resident loans were driven by FI and insurance loans (+3.3% mom in Jan 22) although there was a similar trend of large personal loan repayments (-4.4% mom in Jan 22). In line with a softer GDP growth outlook in FY22F (FY22F: +4.2% vs. FY21: +7.2%, CGS-CIMB Research), amid sustained weakness in the construction sector as a result of labour shortages and subdued services sector, Singapore banks have similarly cautioned investors to expect a more moderate mid- to high-single digit loan growth in FY22F, relative to the c.8-10% recorded in FY21.
Stark system deposit outflow as interest rate expectations rise
There was a stark 1.3% mom outflow (-S$21.5bn) of system deposits in Jan 22 – the majority of this was in foreign currency (FCY). CASA outflows accounted for the net contraction (-2.3% mom or S$26.9bn) in Jan 22 as fixed deposits recorded a +1.2% mom (S$5.5bn) rise. This comes on the back of rising expectations of Fed rate hikes over the month in view of persistent inflation readings in the US, spurring an increase in
3MLIBOR. On balance, 3MSIBOR/3MSOR/3MLIBOR rose by an average of 1bp/9bp/18bp to 0.45%/0.39%/0.34% in Jan-Feb 22 from the average 0.44%0.31%/0.16% in 4Q21. While system liquidity remains ample with LDR holding firm at c.81.5% in Jan 22, further deposit outflows (as investors yield hunt) may be expected in step with the Fed rate hikes to come. While not our base case, banks may face funding pressure ahead in the event of persistent deposit outflows amid stronger credit growth momentum.
Reiterate Overweight; Fed rate hikes are a key catalyst for SG banks
We understand that Russia/Ukraine exposures are limited across Singapore banks. In any case, the banks are holding on to c.S$400m-1.5bn in management overlays and strong c.13.5-15.5% CET1 buffers. We think that the banks are well-poised to benefit from the Fed rate hikes to come given robust CASA ratios; thus, we have factored in six hikes over FY22-23F in our assumptions, raising NIMs c.22-34bp over FY22-24F. While DBS is a key beneficiary of the hikes given its edge in low-cost CASA funding, UOB remains our top pick for the sector given its better risk-return. UOB trades at 1.1x FY22F P/BV – below its peak valuation of 1.4x in Apr 18 during the previous rate hike cycle.