According to data from the Monetary Authority of Singapore (MAS), Singapore’s banking system saw loans grow by 3.4% y-o-y in April, but 1.5 percentage points lower m-o-m. The latest figures came in softer than the monthly 3.6% - 4.2% y-o-y growth observed during January to March this year, Tay and Lim note. “[This reflects] the uncertain outlook as non-resident loans grew only 1.2% y-o-y.”
That said, the record IDR6.7 trillion ($530 million) loan backed by DBS Bank and UOB to develop a data centre campus in Batam’s Nongsa Digital Park in Indonesia, as well as a $692 million green loan from DBS and OCBC for the development of a mixed-use residential project in Tengah, Singapore, shows that loan demand for infrastructure projects across Asean could sustain for the rest of FY2025.
On deposits, Singapore’s banking system saw a 6.1% y-o-y increase in April with the current account, savings account (CASA) ratio relatively unchanged at 52%.
Given the declining Singapore overnight rate average (SORA), the analysts believe CASA ratio is likely to increase as interest rates on fixed deposits (FDs) should have come off to mirror the lower yields on Singapore’s six-month treasury bills, Tay and Lim opine.
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“Coupled with Oversea-Chinese Banking Corporation (OCBC) and United Overseas Bank’s (UOB) move to reduce interest rates on their high-interest savings account (i.e. OCBC 360 account and UOB One account, respectively) from May 1, we see scope for banks to maintain stable funding costs in 2QFY2025,” they add.
DBS sector top pick
Among the three banks, DBS is Tay and Lim’s sector top pick due to its “steadfast execution” of share buybacks and sustainable increments in its dividend per share during the FY2025 to FY2027.
The analysts have an “add” call on DBS with a target price of $47.90 as they believe the bank’s clarity of its capital return initiatives, which comprise a $3 billion share buyback programme as well as a special dividend per share of 60 cents per year over the next three years, to draw in investors amid global uncertainty.
The analysts also like UOB as the bank could benefit from the stronger-than-expected economic activity across China and Asean. Given that about 85% of UOB’s loan book is exposed to the region, the loan demand for projects in Asean would provide “resilience” to its FY2025 earnings. Tay and Lim have an “add” call for UOB with a target price of $38.60.
Finally, the analysts have a “hold” call for OCBC as they think the bank’s ongoing efforts to privatise its insurance arm, Great Eastern Holdings(GEH), will weigh on its capital return policy visibility till 4QFY2025. GEH will have until Sept 30 to conclude the transactions. Tay and Lim have a target price of $17.20 for OCBC.
Overall, the sector will benefit from stronger-than-expected loan growth and a recovery in the SORA following the lower-than-expected interest rate cuts by the US Federal Reserve (US Fed).
On the other hand, a deterioration in non-interest income momentum, higher specific provisions and lower FY2025 earnings guidance are downside risks.
