How Singapore banks beat ASEAN peers in terms of asset quality

Stronger earnings predicted for 2014.

According to DBS, it is raising Singapore banks to overweight, both within the Singapore context and among our ASEAN banks coverage.

Besides improved prospects in 2014 coupled with possible interest rate hikes, we believe Singapore banks provide a flight-to-safety theme in the near term, especially when compared with its ASEAN counterparts, says DBS.

Here's more:

We have imputed NIM recovery and stronger earnings growth for 2014. 2013 earnings will be subdued on flat NIM and normalised provisions. NIM has reached an inflection point; potential recovery in 2014.

NIM has finally started to stabilise, as evidenced in the recent set of 2Q13 results. NIM pressure appears to be well combated. Banks have started to price up loans.

As such, banks with higher CASA composition as well as better S$ liquidity should be well positioned. We believe OCBC is in a better position (vs UOB) given that its S$ loan-to-deposit ratio is 84% (UOB: 95%) while its CASA to total deposits stands at 50% (UOB: 42%).

Asset quality intact; watch unemployment and job creation rate. We believe days of extra-low provision cycle are over; current levels of 30bps will be the new normal.

That said, Singapore banks’ asset quality is the best among ASEAN peers. While unemployment rates should be watched closely to detect asset quality issues, it is equally crucial to monitor job creation.

While unemployment rate has inched up to 2.1% from 1.9% in 1Q13, job creation has increased significantly. Hence, risk to a NPL spike should be limited at this juncture.

Preference for OCBC is a contrarian view. Despite weak contribution from insurance in 2Q13, its banking operations were strong and solid; testimony of the strength of its banking operations.

OCBC’s exposure to China is small vs UOB, while it has no operations in Thailand. OCBC and UOB have relatively small exposure in Indonesia at 6% and 4% respectively. OCBC’s Islamic banking business offers an added advantage over UOB in terms of product offerings.

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