Broker's Take: Great expectations of Singapore banks

SINGAPORE banks are trading at premiums that suggest high expectations of zero oil-and-gas provisions, a sharp rise in benchmark rates to price loans, or chunky fees, said CIMB Research in a report this week.

"With high expectations, it is easy to disappoint," said the brokerage, which held its "underweight" rating on the sector.

Current market valuations imply a return of return on equity (ROE) to 11 per cent. Yet, the banks closed off 2016 with ROEs of 8-9 per cent, dragged by high specific provisions in the fourth quarter for their oil-and-gas exposure.

"We are watchful of the banks' exposure to oil-and-gas companies with high net gearing, bonds due in 2017-18, and no ties to a larger conglomerate," said CIMB, pointing to Ezra as one example.

In 2016, DBS and UOB had large general provision (GP) writebacks in periods when specific provisions were high. However, with GP-to-loans ratio at the Monetary Authority of Singapore's minimum of one per cent for DBS and OCBC, there is no room for further GP writebacks for the two banks. Also, with the banks aiming to keep a coverage ratio floor of 100 per cent, an equal amount of provisions would have to be made for every new non-performing loan, said CIMB. The exception is UOB, which still has headroom given that its GP-to-loans ratio is at 1.2 per cent.

CIMB has replaced DBS with UOB as its top pick. OCBC is its least preferred.

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