SGD LDR has hit 83.4%, its highest in over a decade after four years of sagging industry SGD deposit growth vs loan growth.

Liquidity is tighter but large local and foreign banks remain more than amply funded. DBS is best positioned for more intense competition, UOB less so.

Maintain Overweight on banks. DBS remains our top sector pick, followed by UOB. Stay cautious on OCBC.

Slow deposit growth pushes LDR to 11-year high

Industry SGD deposit growth has slowed significantly in the past four years to 8.2% pa (vs 14.2% pa from 2005-2010), trailing behind industry SGD loan growth of 14.4% pa. As a result, industry SGD loan-to-deposit ratio (LDR) hit 83.4% at end-March, its highest in 11 years. With deposit growth likely to languish for the next 12 months as the depressed interest rate environment makes holding cash unappealing, fear of renewed competition for deposits sparking an increase in cost of funds has surfaced.

Competition stays but banks unlikely to overreact

We do not think Singapore banks will react rashly to competition. For one, system-wide SGD liquidity remains ample, with LDR at a comfortable 83.4%. Even assuming zero deposit growth, current industry excess SGD deposits of SGD91b can support two years of 8% pa industry loan growth before pushing LDR beyond 100%. Moreover, local banks, especially DBS and OCBC, are flush with liquidity with SGD LDRs of 73% and 79%, respectively. The large foreign banks such as Standard Chartered (76.1% LDR) and HSBC (73.2%) also enjoy ample liquidity for their Singapore operations. Lastly, Singapore banks have proven capable of raising substantial USD deposits (2013: +52.6%, 2012: +29.1%, 2011: +27.9%), allowing them to reduce reliance on SGD swaps to fund their USD lending.

Who stands to lose less if deposit competition intensifies? Of the three Singapore banks under our coverage, we believe DBS is best able to hold its ground should deposit competition intensify, given its extremely liquid balance sheet and a solid deposit franchise characterised by the highest proportion of cheap funding ratio. Between OCBC and UOB, we think the latter is more at risk.

Maintain Overweight on banks. For exposure, DBS is our top pick as it is best positioned to take advantage of a rising interest rate environment. We would remain cautious towards OCBC.  

Source: Maybank Kim Eng Research - 20 May 2014