The long-awaited comeback of the Singapore banks

IT'S safe to say that 2020 was an awful year for the Singapore banks. However, as we transit to a post-vaccine world, the long-awaited comeback of these cyclicals may finally be here. Despite the run-up in share prices over the past two months, we still find Singapore's banking sector an attractive place to be in as fundamentals begin to improve.

1) Easing loan loss provisions

For the FY2020, rising loan loss provisions was unsurprisingly the main culprit that dragged down earnings for the three local banks as they each set aside large amounts of reserves in preparation for the potential surge in bad loans arising from the pandemic. However, the good news is that given how the banks had front-loaded allowances in the first half of 2020, we believe that loan loss provisions have peaked and will gradually return to their normal levels over the next two years. This signals a turning point for the banks' earnings.

In addition, investors who are concerned about loans under moratorium will be relieved to know that such loans have been falling over the last few quarters as the economy recovers from the pandemic. The banks have provide quarterly updates on the status of the loans under moratorium, and as of their respective 3Q20 quarterly reports, such loans have become relatively insignificant as a proportion of their total loan books.

2) Net interest margins (NIM)

While we acknowledge that interest rates are likely to remain low over next couple of years, we believe that NIMs have largely stabilised. Any substantial compression in margins in 2021 seems unlikely, especially since the global economy and credit environment have largely improved from the Covid-19 shock.

On a brighter note, given that the three banks are flushed with liquidity as deposits have outpaced loan growth over the past few quarters, we believe that the banks could redeploy their capital into higher-yielding assets, such as loans. We believe this could help to offset some of the impact from low-interest rates, providing a level of support to their NIMs.

3) Loan growth may offset the impact of flattish NIM

In the coming quarters, we could also see a supportive environment for a pick up in credit growth, which will be a factor that will provide support to the banks' net interest income.

We expect loan growth to come in at roughly 4 per cent across the three banks based on management's guidance.

Since loan growth is usually a function of GDP, we believe there could even be more room for more expansion given the three banks' presence in Asia, where most economies have been improving and are set to rebound in 2021.

A pick up in credit growth will help to support the banks' net interest income and hence, overall earnings.

4) Strong fee income to support earnings

Not even the Covid-19 pandemic has hindered the banks' wealth management growth trajectory, as they reported Ran average growth of 10 per cent in their 2020 wealth management fees. The asset management industry is set for another decade of growth, driven by the increasing wealth of high-net-worth individuals and the mass affluent. We believe that Singapore banks are in a good position to capitalise on these opportunities to grow their AUM, allowing them to benefit from the exciting growth of financial assets.

Consumer spending is also expected to return as Singapore's economic recovery picks up. This bodes well for card fees, which makes up about 16 per cent of the banks' fee income.

5) Singapore banks are also attractive yield plays with healthy capital ratios

In July last year, MAS called on the three local banks to cut their dividends as a pre-emptive measure to conserve capital. However, as Singapore recovers from the pandemic, we believe there is a good chance that the banks' dividend caps would soon be removed.

If we assume that dividends to be paid in 2021 are to return to their pre-Covid levels, this would suggest that the banks are offering an attractive dividend yield of about 5.5 per cent on average.

Besides, the three banks also have adequate capacity to resume their distribution plans, as measured by their healthy capital ratios despite making hefty provisions in 2020. Paying 2021 common dividends will shave off approximately 100 to 110bps from the banks' current CET1 capital base.

Overall, we remain positive on Singapore's banking industry and we expect the banks' earnings to register a strong rebound in 2021, driven mainly by the easing of loan loss provisions.

Their current valuations also suggest that there is still room for further gains in the coming year. While you may consider investing in each of the individual banks, those who prefer a more diversified exposure can consider the Nikko AM Singapore STI ETF (SGX:G3B) or the SPDR Straits Times Index ETF (SGX.ES3), which has a combined 40 per cent exposure to DBS, OCBC and UOB.

• The writer is the Equity Analyst of the Stocks & ETFs Research team at FSMOne.com. FSMOne.com is the Business-to-Consumer (B2C) division of iFAST Financial Pte Ltd., the Singapore subsidiary of SGX Mainboard-listed iFAST Corporation Ltd.)