Singapore banks seen posting solid Q2 profits

Singapore's big three banks will soon be turning in their earnings reports for the second quarter. Analysts say they expect the trio to announce solid profits - thanks to a rise in their stockbroking businesses and one-time gains from asset sales. DBS, UOB and OCBC together racked up profits totalling some S$1.3 billion during the first quarter. And analysts believe, the April to June period was just as busy for the nation's three domestic banks because, despite weak loans growth during that period, trading volume in the stock market shot up.

Leng Seng Choon, Banking Analyst, UOB-Kay Hian, said: "Overall, we believe the net interest margins will be relatively flat. In second quarter, we saw stock market turnover growing by 76 percent year-on-year. So that is a very positive factor and will translate into stronger broking income for the banks. In second quarter, Singapore GDP was like up 7 over percent year-on-year. So in that sense I think that will mean asset quality of the banks will continue to be good and this will also mean that provisions will be relatively low."

Property sales at OCBC and UOB are also expected to bolster their Q2 earnings. Both banks sold non-core assets to comply with a July deadline set by the central bank.

Roger Tan, Investment Analyst, SIAS Research, said: "For the second quarter, year-on-year, we are expecting an improvement of about 20 to 22 percent. In the first quarter of 2006 alone, year-on-year, we've already seen banks improve their bottomlines by about 17 percent. So putting the first quarter and the second quarter together, we should see an improvement in the bottomline on average of the banks of about 20 percent year-on-year."

And despite high oil prices and the risk of a hard landing in the US economy, market watchers are sanguine about the second-half prospects for the Singapore banks. They foresee greater demand for loans ahead as upcoming mega projects kick in and require financing.

Leng Seng Choon said: "One area that investors are looking at is the potential loans growth. We are aware that the integrated resorts as well as Orchard Turn projects and we estimate that these could lead to loans increasing by some S$10 billion over the next 2 to 3 years. That amounts to something like 5 percent of the total loans book of Singapore."

Total outstanding loans in the Singapore banking system is currently about S$190 billion. - CNA/ch

Extracts fm CIMB Report dated 13-Mar-06,

Precusor to OUE divestment UOL gets exposure to promising OUH

OUE transfers two properties to JVCo. Two of UOB’s associated companies announced a related party transaction. 57%-owned OUE (OUE SP, S$11.50, NR) will transfer OverseasUnion House (OUH) and Change Alley Aerial Plaza (CAAP) to Clifford Development (JVCo), a wholly-owned subsidiary of OUE. The JVCo will pay a consideration of S$73m, based on an average of the valuations conducted by two independent valuers. 90% of the consideration is to be satisfied by shares by the JVCo to OUE, with S$7.3m remaining as an outstanding loan as a shareholders’ loan.

UOL gets exposure to redevelopment potential of OUH. UOL (UOL SP, S$2.63, Outperform) will subscribe for 32.85m shares in theJVCo, paying S$32.86m in cash. UOL will also grant a shareholders’ loan of S$3.65m. Upon completion of the deal, UOL and OUE will end up having 33.3% and 66.7% equity stake in the JVCo. Transaction effectively reduces OUE’s direct exposure to OUH. More importantly, UOL have the option to increase its equity stake in the JVCo to 50% within the next 12 months.

Comments

First OUE’s UOB-stake reduced, now exposure to OUH reduced. We see this latest transaction as another precursor to the divestment of OUE. UOBowns 56.98% of OUE and needs to bring this stake down to 10% by 19 July 2006. OUE holds little sentimental value for the Wee family, as it was brought into UOB Group when OUB was acquired. Hence, UOB is more likely to cede control of OUE to an outsider if needed. However, before that is done, there are pieces of strategic assets within OUE that needs to be addressed first. This is already work-in-progress. In 2006, OUE had reduced its 3.1%-stake in UOB down to 1.45%. This latest transaction looks to be shifting some of the redevelopment potential of OUH to UOL. OUH is valuable because of its redevelopment potential, given its proximity to the Marina Integrated Resorts.

Wee’s family ownership stronger via UOL.We believe that the latest transaction is done because the Wee’s family ownership is stronger at UOL. Currently, the Wee family owns 26.8% of UOL but has no direct stake in OUE. With the latest stake, the Wee family can still benefit from any redevelopment potential of UOL, even after OUE is divested.

After the remaining 1.45%-UOB stake is sold, OUE will essentially just be a hotel stock. At the market current price, the 1.45% stake in UOB is worth S$342m, easily absorbed by UOB’s ongoing share buyback programme. With the latest proposed transaction and after selling the remaining 1.45%-UOB stake eventually, the prime asset in OUE would be the Mandarin group of hotels. At that stage, our base case scenario is for UOB to distribute its stake in OUE in-specie, back to shareholders. That would amount to another 64cts/UOB share of special dividend for UOB shareholders (4.2% special dividend). While that is an easy way to conclude the OUE divestment, we believe that there are other transactions that could be even more value-accretive for UOB. This would include trying to find a hotel buyer that would be willing to pay a control premium for a 47%-stake in OUE.

Extracts fm CIMB Report dated 17-Mar-06,

Gains from Robinson sale smaller than property sales

OCBC rumored to sell Robinsons

Indonesia Lippo Group as buyer for Robinson? The press reported that OCBC is close to completing a deal to sell its stake in Robinsons (ROB SP, S$6.45, Neutral). Market rumors suggest a pricing as high as S$7.00 for Robinsons. The buyer is rumored to be the Lippo Group. The buyer is also rumored to have given an undertaking to operate Robinsons under the group’s established retail name. Lippo was one of the four bidders that recently took part in a recent closed tender for OCBC’s stake in Robinsons.

Comments

Makes sense for a foreign retailer to buy. The rumors probably have some truth as it makes sense for a foreign retailer to look at Robinsons. Lippo controls Indonesia’s largest retailer, Matahari. Matahari is involved in department stores and supermarkets in Indonesia. In the past three years, Matahari has also expanded into hypermarts and shopping malls. The acquisition of Robinson’s will give Matahari the platform into Singapore as well as build on its shopping malls strategy.

Shareholding structure of Robinsons. OCBC has a direct stake of 16.8% directly through the banking group, but owns another 14.0% owned through insurance subsidiary, Great Eastern’s (GE SP, S$14.20, Neutral). The stake that needs to be brought down to 10% (under the divestment rules) only applies to OCBC’s direct stake and not to GE’s stake. However, in our opinion, for the Robinsons stake to be sufficiently attractive enough for Lippo’s Matahari, OCBC’s cumulative stake would probably be sold. We estimate that OCBC could record divestment gains of between S$80-90m for its 16.8% stake. Robinson represents the last of OCBC’s equity stake that needs to be divested.

Gains not as significant as property divestments. The gains from Robinsons will not be as significant as the gains that OCBC will reap from ts non-core property assets sales. At the moment, a piece of prime residential land on Kim Seng Road is also out for sale. Using its last market valuation on 2004 Annual Report, gains would be at least S$142m, but on current property sentiments we expect gains to probably come in above S$200m. Onwards, there are other properties assets that still available for sale. One of the biggest components of its current property surpluses would be Specialist Shopping center. (>S$256m gains). We expect property sales to be a bigger replenishment of capital for OCBC.

Valuation and recommendation

Maintain Neutral. Our target price for OCBC is unchanged at S$7.20. Capital management news flow is always good for OCBC though we caution that the market is already expecting such news flow and Robinson’s sale is not as significant as the gains from other property sales that we expect over the year. We expect divestments to bring back capital for OCBC to sustain share buybacks and overseas investments. Our recent downgrade was premised on slowing operations in Singapore. We maintain out Neutral rating.

Extracts fm CIMB Report dated 6-Mar-06,

More reasons to buy UOB; DBS a 2H story

• Upgraded UOB to top pick; fee income strength plus divestment catalysts. Although UOB’s 4Q05 results came in only slightly above our expectations, we saw enough positives to upgrade our rating from Neutral to Outperform. UOB is now our pick of the sector. Operationally, its strong fee income trends and margin stabilisation have convinced us that the worst is over for the bank. Other reasons for our optimism include: 1) an alleviation of capital concerns; 2) the dissipation of share-overhang concerns; and 3) potential yield upside from the distribution of OUE in specie. 
  
• OCBC had a decent quarter but the good news is in the price. The other bank that reported above-consensus results was OCBC. Unfortunately, the outperformance was largely driven by special dividends from Raffles Holdings and gains from the sale of investment securities. Operationally, Malaysia was strong but Singapore was fairly weak. With the strongest Tier-I ratio and the best exposure to Singapore’s rising property values, we believe that its divestment/re-investment angle is not over. That said, OCBC’s stock has performed well for quite a while, with valuations now fairly stretched. We downgraded it to Neutral from Outperform. 
  
• DBS had a lousy quarter but too cheap to downgrade. DBS’s core earnings were a disappointment even if we overlook the goodwill issue. Core earnings were 13% below our expectations On the back of a 100bp spike in the SIBOR and a widening of the prime-HIBOR spread, DBS’s 4Q05 NIM rose 14bp qoq. This allowed DBS to leapfrog UOB to become Singapore’s highest-margin bank. Unfortunately, this was about its only positive. Treasury income fell to a new low, costs rose, provisions normalised while earnings disappointed. 
  
• Still waiting for the yield curve to steepen. We would only Overweight banks when the yield curve starts to steepen again. Loan growth is still slow at the moment and may only rev up towards end-2006. Meanwhile, margin expansion is capped by deposit competition from foreign banks. 
  
• UOB is our top choice, OCBC has capital management value, DBS needs to address its sputtering treasury income. We highlight UOB as our sector pick, on reasons stated above. UOB’s core P/E (12.9x) and P/BV (1.4x) are slightly higher than DBS’s but we expect it to have the strongest cash ROE in FY06. DBS badly needs to revive its treasury earnings before its ROE can improve; it could well be a 2H06 story. At 12.2x CY06 P/E and 1.4x P/BV, DBS is not expensive, but it has no near-term catalysts. OCBC has the best capital management value, given its large capital buffer. However, after a steady year of outperformance, its CY06 P/Adj.BV of 1.45x is now comparable to peers’ while core P/E of 15.9x looks expensive vs. peers. We believe that much is in the price.

Extracts fm CitiGroup Report dated 2-Feb-06,

Singapore Banks Big Picture

Macro signs look positive for 2006, but near-term bank earnings catalysts remain muted

Summary

• Property recovery gathering pace: URA residential property price index in 4Q05 rose +1.4% qoq (3Q05: +1.2%), FY05 +3.9% yoy (FY04 +0.9%). More important, 8,955 units were sold in 2005 compared with 5,785 units in 2004
  
• Dec unemployment rate 2.6%: Lowest since 2001 and reflective of improving labor market conditions, which could underpin stronger domestic demand
  
• Loan growth may be bottoming out: Dec 2005 loan growth +0.7% mom (FY05 +2.2%YoY, Nov 2005 +0.8% mom), driven by loans to financial institutions (possibly transitory in nature) and construction
  
• Stock market near six-year high, record volumes: YTD Jan avg. daily turnover (Source: Bloomberg) S$1.15bn near record levels.
  
• 3M S$ SIBOR 3.36%, yield curve remains flat: 3M S$ SIBOR remains above fair value (estimated at 2.8% by our economists, vs. the 10-yr yield at 3.35%), for upward pressure on deposit rates and muted gapping/treasury income
  
• DBS top pick (DBSM.SI, 1L, S$16.70, TP S$18.10) on reflation theme: We are bracing for a somber 4Q05 results season, but prospects are positive for a return to loan growth, stable margins and fee income growth later in the year.

BT, Published January 12, 2006
UOB rally expected to peter out

But of five reports by foreign brokers, three call for a 'buy' or 'overweight'

ALTHOUGH investors initially welcomed United Overseas Bank's announcement last Friday of a $600 million share buyback, some analysts have suggested that further upside may be limited. Of five reports by foreign brokers after the buyback announcement, three call for a 'buy' or 'overweight' on UOB, one is 'neutral' and one an outright 'sell'. UOB's shares, in the meantime, have been treading water, after having surged 40 cents to $15.20 last Friday following the share buyback news.

The bank said the buyback has three objectives - to manage its capital structure to achieve an efficient mix, to manage surplus capital so it may be returned to shareholders in an expedient and cost-efficient way and to improve return on equity. Some observers have speculated that the move will put UOB's 57 per cent subsidiary Overseas Union Enterprises (OUE) into play, given that OUE owns 3.2 per cent of UOB and that UOB has until July to reduce its OUE stake to 10 per cent.

Citigroup Global Markets, however, has called a 'sell' on UOB, with a target price of $15.38. It says in a report on Monday that although the buyback is a catalyst for UOB to sell its OUE stake, and despite such a sale being potentially positive for UOB shareholders, earnings-related worries could cap the share price. 'We are concerned about the near-term outlook for (UOB's) recent overseas acquisitions,' Citigroup says. 'Like its peers, UOB will, to some extent, benefit from a return to loans-pricing power. However, costs are likely to remain on an uptrend and provisions are at their cycle trough.' US broker Goldman Sachs is neutral on UOB, saying that although the buyback will provide downside support for the stock, it sees better top and bottomline growth at DBS Bank, given the latter's loan growth momentum and improving margins. Goldman's target price for UOB is $15.80. UBS Investment Research, on the other hand, rates UOB a 'buy' with a $16.80 target price. 'The exercise in our view is directed at achieving UOB's goal of 15 per cent ROE by the end of this year,' UBS says. 'This buyback would lift our current 2006 ROE estimate up by 60 basis points to 13.7 per cent . . . Our price target is derived from the Gordon Growth Model with an ROE assumption of 13 per cent, cost of equity of 9.2 per cent, payout of 50 per cent and growth of 6.5 per cent.' Nomura Asian Equity Research has pegged UOB's target price at $16.50. 'We believe UOB may potentially return up to 59 cents per share via a distribution-in-specie of OUE shares ahead of the July deadline,' Nomura says. 'We forecast a net dividend of 64 cents per share on a net payout of 56 per cent in FY06. Taken together, we see a potential total net 'dividend' return of $1.23.' Lehman Brothers has called an 'overweight' with a target price of $16.50 based on UOB's 'significant capital management potential'.

UOB was unchanged at $15.20 yesterday with 5.7 million units traded.

BT, Published January 11, 2006
OCBC to buy 12.2% stake in China bank

In 570m yuan deal, OCBC will become second-largest shareholder in Ningbo Commercial Bank

(SINGAPORE) In a widely anticipated move, OCBC said yesterday it has agreed to buy a 12.2 per cent stake in China's (NCB) for 570 million yuan or around S$120 million. OCBC will become NCB's second-largest shareholder and the first Singapore bank to own part of a China bank in China. Market observers see the move as a major achievement given that legions of big international lenders and private equity firms have Chinese banks in their sights.

OCBC will acquire new shares in NCB for cash in a deal priced at 2.1 times the Chinese bank's net tangible asset (NTA) value per share at Dec 31, 2004.

OCBC chief executive David Conner said this valuation for NCB - which ranks eighth among 113 city commercial banks in China in terms of assets - compares with a price range of around 2-3 times NTA for comparable transactions involving such banks. OCBC will fund its NCB purchase internally and the transaction is expected to be completed in the first half of this year.

OCBC talked to many banks in China and was in discussions with NCB for more than a year, Mr Conner said. OCBC was drawn to NCB because the latter is 'very customer and small and medium enterprise focused', he said.

NCB also shares OCBC's philosophy of having employees own shares in the bank. More than 1,000 of NCB's 1,300 employees owned a total of 20 per cent of its stock prior to the issue of new shares to OCBC. The single-largest shareholder is Ningbo Financial Bureau with a current stake of 15 per cent.

Mr Conner said the investment in NCB is 'the right size' for OCBC, which would not want to look at investments of US$1 billion or more that big international banks are considering. With NCB growing at 20-30 per cent a year, it will need capital, and OCBC is prepared to put in more capital, said Mr Conner. Over time, he hopes OCBC can increase its stake. At present, regulations in China limit OCBC to owning a maximum of 20 per cent of a bank there.

NCB has 65 branches and sub-branches in the coastal city of Ningbo, which is in Zhejiang province. OCBC will consider investments in banks in other parts of China, but 'we don't want to talk about other investments as we have just gotten married', Mr Conner quipped. China is a huge market and will be 'a very significant part of OCBC's business over time', he said. But he did not want to specify targets in terms of how large a component China should be of OCBC's overall business.

OCBC will provide technical assistance to NCB through a structured training and development programme. Founded in 1997, NCB had assets of 34.3 billion yuan at Dec 31, 2004. Its non-performing loan ratio was 1.2 per cent and its capital adequacy ratio was 10.8 per cent.

Extracted from UOB

Singapore, 6 January 2006 - In exercise of the share purchase mandate renewed by shareholders at the extraordinary general meeting held on 27 April 2005, United Overseas Bank Limited (“UOB” or “the Bank”) will set aside S$600 million for on-market purchases of its ordinary shares for cancellation. The share purchase will be executed through a combination of the normal trading counter, and/or odd lots counter, depending on market conditions, and will be carried out in an orderly manner to minimise undue movement in UOB’s share price. Shares purchased by UOB will be announced in accordance with the rules of The Singapore Exchange Securities Trading Limited. The share purchase is proposed in view of UOB’s objectives of:
(i) managing the capital structure of UOB, with a view to achieving an efficient capital mix;
(ii) managing surplus capital, such that surplus capital and funds which are in excess of UOB’s requirements may be returned to UOB shareholders in an expedient and cost-efficient manner; and
(iii) improving return on equity. Under Banking (Amendment) Regulations 2004, affiliated entities of a bank have until 17 July 2006 to comply with the regulation that they cannot hold in aggregate more than 2% of the voting power in the bank. There are certain restrictions against an increase in the meantime of the aggregate percentage shareholding in the bank held by its affiliated entities. The affiliated entities of UOB currently hold in aggregate around 4% of UOB’s paid-up capital. A reduction in the paid-up capital of UOB as a result of the share purchase may increase such aggregate percentage shareholding and if required, necessary steps would have to be taken to comply with the restrictions.

Extracts fm DBSVickers Report dated 15-Dec-05,

Banking Sector

Five cheers for 2006

The Banking sector performance has lagged the STI so far this year - the SESFIN Index rose 4.7% YTD, while the STI climbed 12.5%. OCBC was the star performer this year, rising 16% YTD, while DBS was at the tail end, gaining only 1.2%. Much of OCBC’s gains this year were due to capital restructuring, inclusion of NISP, higher non-interest income, lower amortisation for intangible assets and goodwill, and provisions writebacks. The flattening of the yield curve featured prominently this year and negatively impacted all three banks, with DBS the most affected. Looking ahead, we are positive about the sector. There are five factors that should drive the share prices and total returns in the banking sector in the year ahead: (i) divestment story, (ii) loans growth driven by housing, (iii) steepening yield curve, (iv) expansion of NIM, and (v) lower NPL provisions and writebacks. We maintain an Overweight call on the sector, and our top pick is UOB. We do not have a rating on DBS due to conflict of interest.

• Divestment of non-banking assets. Both OCBC and UOB have assets that needs to be divested by July 2006. OCBC needs to divest a minimum of 12% of Robinson, and 7% of Straits Trading, which works out to a net gain of c. S$93m or 3.0 cents per share. UOB needs to divest both at least 18% of UOL and 47% of OUE, and gain net S$1,013m, or 66 cents per share. We expect OCBC to pare down its stakes through trade sales, while UOB will divest via distribution in specie. Either way, shareholders should be able to benefit from the divestment with UOB shareholders gaining relatively more.
  
• Loans growth driven by housing and construction. Our year end DBU loan growth is forecasted at 2.3%, given the sluggish domestic lending activity despite improving growth numbers. In 2006, we expect loan growth to accelerate to about 4.5%, with GDP growth likely to climb to 5.3% from about 5.1% this year. In addition, given the benign but improving GDP outlook for the regional economies, we expect loans to be one of the growth drivers for banks in 2006. The risk to this expectation is that loans taken up recently are for new developments, which means they are usually deferred and hence may not be captured in 2006.
  
• Steepening of yield curve. In the past year, the SGD yield curve has flattened considerably and the resultant effect was the loss of gapping and trading opportunities for the treasury business unit of the banks. Given that the current year profits are bereft of gains from a steeper yield curve, there can only be upside when the yield curve reverts to the mean. Our economics team expects the long end of the SGD yield curve to rise about 25 bps from current levels (c. 3.3%) and the short end to fall to 2.7% by end-2006. As such, the steepened yield curve will help widen NIM and arguably usher in the return of earnings contribution from the treasury.
  
• Expansion of NIM. NIM is expected to widen in 2006. In recent weeks, all the local banks have been engaging in either increasing lending rates and/or reducing cost of funds. Housing loan rates had been adjusted upwards by 75 bps to 250bps in some instances, while auto loans have all but crept up. There is also competition to attract deposits so that net borrowing banks do not need to go to the expensive inter-bank market to fund their loans. Indeed, NIM for the three banks have been improving with the exception of UOB in the past two quarters. The active effort to widen NIM augurs well for banks’ earnings in 2006.
  
• Lower NPLs and recoveries. In a reflationary environment, banks tend to benefit through recoveries of NPLs previously written off. It was no different in the last quarter and going into 2006. In 3Q05, OCBC benefited from a net recovery of S$43m. Since 4Q04, NPL ratios of all three banks had been declining, and we expect this trend to continue in 2006. Recoveries will help the bottom line of the banks.

Extracts fm DBSVickers Report dated 1-Dec-05,

Banking Sector

October 2005 loans data: Mixed

Oct 2005 non-bank loans data showed a fall in DBU loans of –0.1% q-o-q for the first time in 7 months, led by fall of 2.3% in loans to buildings and construction sector and a decline of 0.4% in car loans. Housing loans rose 0.4% in line with expectations. We are not too worried over the apparent slowdown in DBU loans as the sharp drop in the buildings and construction sector can be explained by loans paid down due to higher sales of residential properties. ACU loans grew at a slower pace of 0.3%, led by loans to businesses, particularly a 5% rise in loans to general commerce. We remain positive on the banking sector given the robust outlook in the property sector and the general benign forecast of the Singapore economy. We expect Singapore’s economy to grow 5.3% in 2006. Due to DBS’ interest in our research house, we cannot issue a rating for DBS. Our top pick at current price levels is OCBC.

• Domestic loans fall for 1st time in 7 months. DBU loans to non-bank customers decelerate for the first time in 7 months, posting –0.1% q-o-q in October to S$180.3bn. Loans to businesses, which according to a newly released MAS breakdown, comprised about 49% of total DBU loans, contracted 0.5% from previous months levels. This was led by a 2.3% q-o-q decline in loans to the construction sector. This can be explained by loans taken up by property developers being paid down due to increase sales. In addition, there is a lag effect before loans to new developments pick up. Loans to consumers strengthen however, to +0.3% q-o-q from Sep 2005, led by rise in housing (+0.4%) and credit card (+1.1%).
  
  
• ACU loans continue to rise, but at a slower rate. Loans to Asian currency units (ACU) remained robust, gaining 0.4% q-o-q in October to S$152.1bn. The pickup was mainly driven by +0.3% increase in ACU loans to businesses, in particular a 5% rise in loans to general commerce and +0.4% growth in the manufacturing sector.
  
  
• Overweight maintained. We remain positive on the banking sector given the robust outlook in the property sector and the general benign forecast of the Singapore economy. In addition, the recent October IPI data pointed to strong growth in the technology and offshore marine sectors, putting upward pressure on our DBS GDP growth forecast of 5.3%. We maintain our overweight call on the banking sector. Please note that we cannot recommend DBS due to perceived conflict of interest. Between OCBC and UOB, we prefer OCBC at current price levels.

BT, Published November 10, 2005
Poor loans growth a setback for local banks

THANK goodness for foreign banks, savers must be muttering to themselves as these institutions court them for their funds and, in doing so, push the local banks into improving their own savings products.

Maybank this week upped the stakes on the savings front by launching an online savings account offering higher interest rates with ATM access. Citibank announced further higher rates for its ''unfixed' deposit product.

The three local banks - DBS Group Holdings, United Overseas Bank and OCBC Bank - have fought back by increasing interest rates for fixed deposits though they have yet to offer similar online savings account products.

Actually, OCBC Bank's wholly owned Bank of Singapore finatiq.com does offer an online savings account, although it is little publicised. 'Who?' some may ask - because after the 2000 dotcom bust, the website has maintained such a low profile that it is not clear how much OCBC wants to use its finatiq.com to bring in deposits.

The three local banks have to increase interest rates for savers in line with a rising interest rate environment or run the risk of losing customers who could be tempted to invest some of those funds in higher-margin unit trusts.

Typically, when the economy is growing, local banks do well as they are able to lend more at higher interest rates in line with a rising interest rate climate, so paying more to depositors does not matter.

The problem for the local banks is that deposits and savings are rising at a faster rate than loans are. Latest official data shows that there is little growth in lending. At end-September, lending growth was hovering around 1.5 per cent while the increase in customer deposits was zipping along at almost 10 per cent. The 12-month loan-to-deposit ratio continued its relentless downward trend.

The overall picture points to a double whammy for the banks - an almost stagnant loan pie means they cannot increase lending rates as much as they would like while having to pay out more to their depositors.

As OCBC Bank noted yesterday, the average rate on interest-earning assets increased by 69 basis points over the first nine months of this year, but the cost of funds rose at a higher rate of 81 basis points, resulting in net interest margin decline to 1.81 per cent from 1.90 per cent. Its loan-to-deposit ratio fell to 87.4 per cent from 91.8 per cent a year ago.

DBS was the only bank of the three to show an improvement in the group loan-to-deposit ratio. At the end of September, it was 68.9 per cent - up from 62.8 per cent a year before.

But DBS continued to labour under its $115.6 billion mountain of deposits, for which it had to almost double the interest rate it was paying - an average rate of 1.15 per cent for nine months of this year, up from the average rate of 0.64 per cent in the corresponding part of 2004.

DBS's average net interest margin for the first nine months of this year fell one point to 1.82 per cent.

UOB suffered pretty much the same fate as OCBC. Its loan-to deposit ratio fell to 78.9 per cent from 83.3 per cent a year ago.

In UOB's case, while it can continue to boast of having the highest average interest margin of 1.99 per cent among the local rivals, it is still declining. It was 2.11 per cent in 2004.

Local banks have traditionally performed better than foreign banks in a rising interest rate environment because their much bigger branch network means easier access to cheap funds, but the poor loans growth figure is a setback. So while the local banks in the third quarter reported increased profits from a year ago, a closer look at details paints a less rosy picture.

Extracts fm Lim and Tan Report dated 10-Nov-05, 

• There is little to comment on OCBC’s Q3 results, coming after DBS’ and UOB’s, other than the fact that excluding exceptional gains of a year ago, OCBC would have done the best. Yet, in other areas, such as interest margin, loan growth, OCBC has lagged others.
  
  
• Key point is that the 3 bank stocks have put up an uninspiring stock market performance this year, which could be attributed to:
  
  
  
  
  • Big IPOs of China banks this year. Bank of Communications in May this year, and China Construction Bank last month, which sucked up almost US$10 bln.
    
    
  • Improved prospects for Japanese banks because of the end of a long deflationary period in Japan, resulting in strong stock market performance of the big Japanese bank stocks this year.
    
    
  • The strong profit growth at international banks like UBS, Credit Suisse, Deutsche Bank, especially in areas like wealth management.
  
  
  
• It is therefore a lot more than just a case of competition from foreign banks, falling margins, and lethargic loan growth.
  
  
• Hopefully, with the strong recovery of the residential property market in the past 12 months, and the expected recovery of consumer spending, thanks to better economic outlook, prospects for local banks will be looking up in 2006, hence our recommendation to buy bank stocks.

Extracts fm CitiGroup Report dated 2-Nov-05,

• Reflation - DBS top pick (DBSM.SI, 1L, S$15.30, TP S$18.10): 3M SIBOR at 2.52% (near 5-year highs), benefits DBS as the largest S$ interbank lender, large corporate lender, and has the highest operational leverage of its peers.
  
  
• DBS raises mortgage rates: DBS has largest Singapore mortgage book of its peers, and just raised its mortgage board rate by 25bps, the third time this year
  
  
• Deposit wars more intense, pushing up funding costs: Average counter rates for 3M time deposits edged up 11bps for the month, while rates for balances above S$50k rose around 10bps and hover in the range of 1.5%-1.8%. 1M-12M SIBOR yields rose an average 13bps in Oct 2005
  
  
• Non-interest income dull from flat yield curve: Recent 3Q05 bank results continue to show weak treasury income, as the long end of the yield curve remains just 51bps above 3M money 
  
  
• Mortgages still weak, but home sales improving: URA 3Q05 data suggests that residential sales may be picking up in the resale market, rather than just from primary launches, which could spur current weak mortgage volumes
  
  
• Sep CPI jumped 0.6% yoy and 0.2% mom as energy costs continues to filter through in the form of more expensive holiday travel and higher transport costs

Extracts fm DBSVickers Report dated 31-Oct-05,

3Q05 results: Non interest income surprise : Maintain Buy

UOB 3Q05 results were above our expectations. Net profit rose 25% y-o-y and 13% q-o-q to S$463m, with growth mainly from unexpected 26% q-o-q increase in investment related activities and fund management. Interest income rose 5% to S$1,229m from 2Q05 while interest expense rose at a faster rate of 9% to S$651m, which is reflected in the continued decline in NIM falling to 1.93%. Customer loans rose 2% to S$65.7bn while NPL fell to 6.2% from 6.7% in 2Q05. Loan-Deposit ratio fell 2% to 78.9% from 80.3%. ROE rose to 13.6% from 11.9% in 2Q05, inching its way to the 15% internal ROE target. We revised our earnings estimates but maintain Buy with a revised target price of S$16.00 based on 14x PE and 1.6x P/ RNAV.

-- Edited by KK at 20:05, 2005-10-31