Singapore banks:A lacklustre 3Q17?Who cares?

Fuelled by hope again. Despite an unexciting 2Q17 and more cautious guidance fromDBS during its last analyst briefing, stocks have rebounded from recent lows, rising 5-8%since mid-September thanks again to hopes of improving revenue prospects andsustained asset quality resilience (Singapore banks: Hopes are deflating, 9 August 2017).

    It is hard to fault the market’s optimism, given the positive macro data we have seen (Fig9 and 11). Still, there are three points worth considering:1. It may take time for credit growth to pick up meaningfully. Sector DBU loangrowth rose 5% y-o-y and 3% YTD in August 2017. In short, the strong 6.3% q-o-qsaar 3Q17 GDP growth has yet to filter through to credit growth (Fig 6).

    2. Higher interest rates q-o-q but not for the year. 3-month SIBOR and SOR rose0.13bp and 0.17bp since June, respectively. This may lead to higher NIM, but it maytake three months for assets to re-price. More importantly, the average 3-monthSIBOR YTD is just 4bp higher than the 2016 average, while the average 3-monthSOR YTD is 6bp lower than the 2016 average. In short, 2017 NIM may not be muchhigher than 2016 levels (Fig 8).

    3. Credit cost may not improve much. There is little evidence to suggest broadbasedasset quality weakness; however, conditions may not get better as NPLs arenear multi-year lows despite slipping since 2014 (Fig 12). The risk to future earningsis more pronounced as provisioning reserves have fallen greatly since 2014 (Fig 13).

    The adoption of FRS9 accounting standards in 2018 could lead to more uncertainty.

    Stay tactically positive. Preferred pick is OCBC (Buy). OCBC will report 3Q17results on 26 October followed by UOB (Hold) on 3 November and DBS (Hold) on 6November. We expect 3Q17 to reflect modest credit growth, flat to marginal NIMimprovement, and stable credit cost. This should translate into 4-10% y-o-y EPSgrowth (Fig 20). While this may not be exciting, we believe the market may interpret“no bad news” as good news as it looks ahead to 2018 with hope that strong macrodata will translate into better top-line growth while asset quality risks are kept at bay.

    At 11x 2018e PE and 1.1x December 2018e PB, the sector does not look expensive,but we need to remember that these valuations already reflect marginal NIMimprovement and sustained credit cost resilience. Our top sector pick is OCBC (Buy).